UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark ~~One~~)One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2018~~2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission File Number: 001-34527

EMCLAIRE FINANCIAL CORP

(Exact name of registrant as specified in its charter)

Pennsylvania	25-1606091
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

612 Main Street, Emlenton, Pennsylvania	16373
(Address of principal executive offices)	(Zip Code)

(844) 767-2311

(Registrant’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $1.25 per share	EMCF	NASDAQ Capital Market (NASDAQ)
(Title of Class)	(Trading Symbol)	(Name of exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐

Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the Registrant’s common stock was ~~2,690,312~~2,698,712 at November 8, ~~2018.~~2019.

Table of Contents

EMCLAIRE FINANCIAL CORP

INDEX TO QUARTERLY REPORT ON FORM 10-Q

			PART I – FINANCIAL INFORMATION

Item 1.	Interim Financial Statements (Unaudited)

	Consolidated Balance Sheets as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018	1

	Consolidated Statements of Net Income for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018	2

	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018	3

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018	4

	Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31 28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4239

Item 4.	Controls and Procedures	4239

			PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	4340

Item 1A.	Risk Factors	4340

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4340

Item 3.	Defaults Upon Senior Securities	4340

Item 4.	Mine Safety Disclosures	4340

Item 5.	Other Information	4340

Item 6.	Exhibits	4340

Signatures		4441

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Interim Financial Statements

~~Emclaire Financial Corp~~

~~Consolidated Balance Sheets (Unaudited)~~

~~As of September 30, 2018 and December 31, 2017~~

~~(Dollar amounts in thousands, except share and per share data)~~

Emclaire Financial Corp

Consolidated Balance Sheets (Unaudited)

As of September 30, 2019 and December 31, 2018

(Dollar amounts in thousands, except share and per share data)

	September 30,		December 31,
	2018		2017		September 30, 2019			December 31, 2018
Assets
Cash and due from banks	$	2,776	$	3,072	$	3,742		$	3,623
Interest earning deposits with banks		19,904		11,302		45,560			7,332
Cash and cash equivalents		22,680		14,374		49,302			10,955
Securities-available for sale		97,509		99,350
Securities-equity investments		473		1,817
Interest earning time deposits						10,198			6,738
Securities - available-for-sale						117,899			97,718
Securities - equity investments						23			7
Loans held for sale		120		504		154			—
Loans receivable, net of allowance for loan losses of $6,360 and $6,127		592,125		577,234
Loans receivable, net of allowance for loan losses of $6,509 and $6,508						688,357			708,664
Federal bank stocks, at cost		4,466		4,662		5,856			6,351
Bank-owned life insurance		11,974		11,724		15,194			14,881
Accrued interest receivable		2,302		2,217		2,754			2,570
Premises and equipment, net		17,722		18,010		20,685			18,911
Goodwill		10,288		10,288		19,460			19,448
Core deposit intangible, net		278		481		1,289			1,423
Prepaid expenses and other assets		12,867		9,423		10,259			11,209
Total Assets	$	772,804	$	750,084	$	941,430		$	898,875
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest bearing	$	133,311	$	126,263	$	155,923		$	148,893
Interest bearing		549,050		528,380		652,102			612,653
Total deposits		682,361		654,643		808,025			761,546
Short-term borrowed funds		2,050		2,500		2,050			12,850
Long-term borrowed funds		17,750		23,500		31,750			32,500
Accrued interest payable		460		413		652			495
Accrued expenses and other liabilities		10,573		9,937		13,022			11,476
Total Liabilities		713,194		690,993		855,499			818,867
Commitments and Contingent Liabilities		-		-		—			—
Stockholders' Equity:
Common stock, $1.25 par value, 12,000,000 shares authorized; 2,373,156 and 2,373,156 shares issued; 2,271,139 and 2,271,139 shares outstanding, respectively		2,966		2,966
Preferred stock, $1.00 par value, 3,000,000 shares authorized; Series C, non-cumulative preferred stock, $2.9 million liquidation value, 286,888 shares issued and outstanding; Series D, non-cumulative preferred stock, $1.3 million liquidation value, 133,705 shares issued and outstanding						4,206			4,206
Common stock, $1.25 par value, 12,000,000 shares authorized; 2,800,729 shares issued; 2,698,712 shares outstanding						3,501			3,501
Additional paid-in capital		31,218		31,031		46,672			46,401
Treasury stock, at cost; 102,017 shares		(2,114)		(2,114)		(2,114	)		(2,114	)
Retained earnings		34,940		32,726		38,142			34,371
Accumulated other comprehensive loss		(7,400)		(5,518)		(4,476	)		(6,357	)
Total Stockholders' Equity		59,610		59,091		85,931			80,008
Total Liabilities and Stockholders' Equity	$	772,804	$	750,084	$	941,430		$	898,875

See accompanying notes to consolidated financial statements.

Table of Contents

~~Emclaire Financial Corp~~

~~Consolidated Statements of Net Income (Unaudited)~~

~~For the three and nine months ended September 30, 2018 and 2017~~

~~(Dollar amounts in thousands, except share and per share data)~~

Emclaire Financial Corp

Consolidated Statements of Net Income (Unaudited)

For the three and nine months ended September 30, 2019 and 2018

(Dollar amounts in thousands, except share and per share data)

	For the three months ended				For the nine months ended
	September 30,				September 30,				For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018		2017		2018		2017		2019			2018			2019		2018
Interest and dividend income:
Loans receivable, including fees	$	6,688	$	5,966	$	19,703	$	17,333	$	8,170		$	6,688		$	24,514	$	19,703
Securities:
Taxable		464		421		1,312		1,208		583			464			1,606		1,312
Exempt from federal income tax		137		134		430		418		79			137			301		430
Federal bank stocks		65		64		221		179		104			65			316		221
Interest earning deposits with banks		112		98		228		151		251			112			397		228
Total interest and dividend income		7,466		6,683		21,894		19,289		9,187			7,466			27,134		21,894
Interest expense:
Deposits		1,183		824		3,277		2,276		1,938			1,183			5,045		3,277
Borrowed funds		142		322		440		954		233			142			769		440
Total interest expense		1,325		1,146		3,717		3,230		2,171			1,325			5,814		3,717
Net interest income		6,141		5,537		18,177		16,059		7,016			6,141			21,320		18,177
Provision for loan losses		300		270		980		633
Provision for (recovery of) loan losses										(145	)		300			305		980
Net interest income after provision for loan losses		5,841		5,267		17,197		15,426		7,161			5,841			21,015		17,197
Noninterest income:
Fees and service charges		528		448		1,428		1,290		531			528			1,622		1,428
Net gain (loss) on sales of securities		(4)		-		(34)		350
Net realized gain (loss) on sales of securities										42			(2	)		43		(9	)
Net gain on sales of loans		35		46		60		176		77			35			129		60
Other than temporary impairment losses		-		-		-		(508)
Earnings on bank-owned life insurance		105		103		311		305		96			105			313		311
Gain on bargain purchase		-		1,307		-		1,307
Other		398		370		1,244		1,076		463			396			1,289		1,219
Total noninterest income		1,062		2,274		3,009		3,996		1,209			1,062			3,396		3,009
Noninterest expense:
Compensation and employee benefits		2,519		2,288		7,493		6,957		3,187			2,519			8,892		7,493
Premises and equipment		736		718		2,264		2,203		810			736			2,536		2,264
Intangible asset amortization		67		58		203		177		44			67			134		203
Professional fees		243		157		712		575		278			243			664		712
Federal deposit insurance		103		115		391		325		—			103			267		391
Acquisition costs		677		963		1,036		1,069		—			677			—		1,036
Other		1,210		1,143		3,437		3,434		1,439			1,210			4,155		3,437
Total noninterest expense		5,555		5,442		15,536		14,740		5,758			5,555			16,648		15,536
Income before provision for income taxes		1,348		2,099		4,670		4,682		2,612			1,348			7,763		4,670
Provision for income taxes		187		392		735		978		444			187			1,372		735
Net income		1,161		1,707		3,935		3,704		2,168			1,161			6,391		3,935
Preferred stock dividends		-		-		-		-		—			—			91		—
Net income available to common stockholders	$	1,161	$	1,707	$	3,935	$	3,704	$	2,168		$	1,161		$	6,300	$	3,935
Basic earnings per common share	$	0.51	$	0.77	$	1.73	$	1.70	$	0.80		$	0.51		$	2.33	$	1.73
Diluted earnings per common share		0.51		0.77		1.72		1.69		0.80			0.51			2.32		1.72
Average common shares outstanding - basic		2,271,139		2,204,949		2,271,139		2,174,210		2,698,712			2,271,139			2,698,712		2,271,139
Average common shares outstanding - diluted		2,291,286		2,220,420		2,288,723		2,190,647		2,719,528			2,291,286			2,715,957		2,288,723

See accompanying notes to consolidated financial statements.

Table of Contents

~~Emclaire Financial Corp~~

~~Consolidated Statements of Comprehensive Income (Unaudited)~~

~~For the three and nine months ended September 30, 2018 and 2017~~

~~(Dollar amounts in thousands)~~

Emclaire Financial Corp

Consolidated Statements of Comprehensive Income (Unaudited)

For the three and nine months ended September 30, 2019 and 2018

(Dollar amounts in thousands)

	For the three months ended				For the nine months ended
	September 30,				September 30,				For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018		2017		2018		2017		2019			2018			2019			2018
Net income	$	1,161	$	1,707	$	3,935	$	3,704	$	2,168		$	1,161		$	6,391		$	3,935
Other comprehensive income (loss)
Unrealized gains/(losses) on securities:
Unrealized holding gain/(loss) arising during the period		(566)		232		(2,180)		638
Unrealized gains/(losses) on securities available-for-sale:
Unrealized holding gain (loss) arising during the period										165			(564	)		2,424			(2,155	)
Reclassification adjustment for (gains) losses included in net income		4		-		34		(350)		(42	)		2			(43	)		9
Reclassification adjustment for other than temporary impairment losses included in net income		-		-		-		508
Net period change		(562)		232		(2,146)		796		123			(562	)		2,381			(2,146	)
Tax effect		118		(79)		451		(271)		(26	)		118			(500	)		451
Net of tax		(444)		153		(1,695)		525		97			(444	)		1,881			(1,695	)
Comprehensive income	$	717	$	1,860	$	2,240	$	4,229	$	2,265		$	717		$	8,272		$	2,240

See accompanying notes to consolidated financial statements.

Table of Contents

~~Emclaire Financial Corp~~

~~Condensed Consolidated Statements of Cash Flows (Unaudited)~~

~~For the nine months ended September 30, 2018 and 2017~~

~~(Dollar amounts in thousands)~~

Emclaire Financial Corp

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the nine months ended September 30, 2019 and 2018

(Dollar amounts in thousands)

	For the nine months ended
	September 30,
	2018		2017		For the Nine Months Ended September 30,
					2019			2018
Cash flows from operating activities
Net income	$	3,935	$	3,704	$	6,391		$	3,935
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		862		864
Depreciation and amortization of premises and equipment						1,022			862
Provision for loan losses		980		633		305			980
Amortization of premiums, net		309		367
Amortization/accretion of premiums, discounts and deferred costs and fees, net						235			309
Amortization of operating lease right-of-use assets						98			—
Amortization of intangible assets and mortgage servicing rights		244		213		182			244
Securities impairment loss recognized in earnings		-		508
Realized losses (gains) on sales of securities, net		34		(350)
Realized (gains) losses on sales of debt securities, net						(43	)		9
Change in fair value of equity securities, including realized gains						(16	)		(36	)
Net gains on sales of loans		(60)		(176)		(129	)		(60	)
Net losses on foreclosed real estate		40		(10)
Gain on sale of premises and equipment		(25)		-
Net loss on foreclosed real estate						32			40
Net gain on sale of premises and equipment						(11	)		(25	)
Loans originated for sale		(4,241)		(4,266)		(5,173	)		(4,241	)
Proceeds from the sale of loans originated for sale		4,685		4,418		5,148			4,685
Write-down of foreclosed real estate		11		-		35			11
Stock compensation expense		187		164		271			187
Increase in bank-owned life insurance, net		(250)		(249)		(313	)		(250	)
Increase in accrued interest receivable		(85)		(310)		(184	)		(85	)
(Increase) decrease in prepaid expenses and other assets		(2,959)		1,265		154			(2,898	)
Increase (decrease) in accrued interest payable		47		154
Decrease in accrued expenses and other liabilities		636		1,095
Gain on bargain purchase		-		(1,307)
Increase in accrued interest payable						157			47
Increase (decrease) in accrued expenses and other liabilities						(277	)		636	��
Net cash provided by operating activities		4,350		6,717		7,884			4,350
Cash flows from investing activities
Loan originations and principal collections, net		(16,679)		(43,771)		19,327			(16,679	)
Purchase of residential mortgage loans		-		-
Proceeds from sales of loans held for sale previously classified as portfolio loans		-		1,817
Settlement of syndicated national credits		-		-
Securities:
Available-for-sale securities:
Sales		12,683		18,195		21,035			12,683
Maturities, repayments and calls		6,822		7,818		12,946			6,822
Purchases		(18,645)		(25,163)		(51,871	)		(18,645	)
Net cash paid for acquisition		-		2,517
Redemption of federal bank stocks		196		(34)
Net change in federal bank stocks						495			196
Net increase in interest earning time deposits						(3,460	)		(2,540	)
Proceeds from the sale of bank premises and equipment		155		-		251			155
Purchases of premises and equipment						(1,492	)		(574	)
Proceeds from the sale of foreclosed real estate		388		144		742			388
Purchases of premises and equipment		(574)		(279)
Net cash used in investing activities		(15,654)		(38,756)		(2,027	)		(18,194	)
Cash flows from financing activities
Net increase in deposits		27,718		57,864		46,479			27,718
Repayments on long-term debt		(5,750)		(750)		(750	)		(5,750	)
Proceeds from other long-term debt		-		5,000
Net change in short-term borrowings		(450)		(7,000)		(10,800	)		(450	)
Proceeds from exercise of stock options		-		1,376
Dividends paid		(1,908)		(1,763)		(2,439	)		(1,908	)
Net cash provided by financing activities		19,610		54,727		32,490			19,610
Increase in cash and cash equivalents		8,306		22,688
Net increase in cash and cash equivalents						38,347			5,766
Cash and cash equivalents at beginning of period		14,374		17,568		10,955			10,176
Cash and cash equivalents at end of period	$	22,680	$	40,256	$	49,302		$	15,942
Supplemental information:
Interest paid	$	3,670	$	3,070	$	5,657		$	3,670
Income taxes paid		560		875		910			560
Supplemental noncash disclosure:
Transfers from loans to foreclosed real estate		526		272		324			526
Transfers from portfolio loans to loans held for sale		-		1,725

Initial recognition of operating lease right-of-use assets						1,642			—
Initial recognition of operating lease liabilities						1,858			—

See accompanying notes to consolidated financial statements.

Table of Contents

Emclaire Financial ~~Corp. and Subsidiary~~Corp

Consolidated Statements of Changes in ~~Stockholders'~~Stockholders’ Equity

(Unaudited)

For thethree and nine months ended September 30, ~~2018~~2019 and ~~2017~~

2018

(Dollar amounts in thousands, except per share data)

	Common Stock		Additional Paid-in Capital		Treasury Stock		Retained Earnings		Accumulated Other Comprehensive Income		Total Stockholders' Equity
Balance at January 1, 2017	$	2,818	$	27,900	$	(2,114)	$	29,960	$	(4,491)	$	54,073
Net income		-		-		-		3,704		-		3,704
Other comprehensive income		-		-		-		-		525		525
Stock compensation expense		-		164		-		-		-		164
Exercise of stock options (53,586 shares)		67		1,309		-		-		-		1,376
Issuance of common stock (58,445 shares)		73		1,601		-		-		-		1,674
Cash dividends declared on common stock ($0.81 per share)		-		-		-		(1,763)		-		(1,763)
Balance at September 30, 2017	$	2,958	$	30,974	$	(2,114)	$	31,901	$	(3,966)	$	59,753

													Preferred Stock		Additional Paid-in Capital - Preferred		Common Stock		Additional Paid-in Capital - Common		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at January 1, 2018, as previously presented	$	2,966	$	31,031	$	(2,114)	$	32,726	$	(5,518)	$	59,091	$	—	$	—	$	2,966	$	31,031	$	(2,114	)	$	32,726		$	(5,518	)	$	59,091
Cumulative effect of change in accounting principle for marketable equity securities, net of tax		-		-		-		187		(187)		-		—		—		—		—		—			187			(187	)		—
Balance at January 1, 2018, as adjusted	$	2,966	$	31,031	$	(2,114)	$	32,913	$	(5,705)	$	59,091	$	—	$	—	$	2,966	$	31,031	$	(2,114	)	$	32,913		$	(5,705	)	$	59,091
Net income		-		-		-		3,935		-		3,935		—		—		—		—		—			1,362			—			1,362
Other comprehensive loss		-		-		-		-		(1,695)		(1,695)		—		—		—		—		—			—			(1,015	)		(1,015	)
Stock compensation expense		-		187		-		-		-		187		—		—		—		75		—			—			—			75
Cash dividends declared on common stock ($0.84 per share)		-		-		-		(1,908)		-		(1,908)
Cash dividends declared on common stock ($0.28 per share)														—		—		—		—		—			(636	)		—			(636	)
Balance at March 31, 2018														—		—		2,966		31,106		(2,114	)		33,639			(6,720	)		58,877
Net income														—		—		—		—		—			1,413			—			1,413
Other comprehensive loss														—		—		—		—		—			—			(236	)		(236	)
Stock compensation expense														—		—		—		75		—			—			—			75
Cash dividends declared on common stock ($0.28 per share)														—		—		—		—		—			(636	)		—			(636	)
Balance at June 30, 2018														—		—		2,966		31,181		(2,114	)		34,416			(6,956	)		59,493
Net income														—		—		—		—		—			1,161			—			1,161
Other comprehensive loss														—		—		—		—		—			—			(444	)		(444	)
Stock compensation expense														—		—		—		37		—			—			—			37
Cash dividends declared on common stock ($0.28 per share)														—		—		—		—		—			(637	)		—			(637	)
Balance at September 30, 2018	$	2,966	$	31,218	$	(2,114)	$	34,940	$	(7,400)	$	59,610	$	—	$	—	$	2,966	$	31,218	$	(2,114	)	$	34,940		$	(7,400	)	$	59,610

Balance at January 1, 2019, as previously presented													$	421	$	3,785	$	3,501	$	46,401	$	(2,114	)	$	34,371		$	(6,357	)	$	80,008
Cumulative effect of change in accounting principle for leases and security premiums, net of tax														—		—		—		—		—			(181	)		—			(181	)
Balance at January 1, 2019, as adjusted													$	421	$	3,785	$	3,501	$	46,401	$	(2,114	)	$	34,190		$	(6,357	)	$	79,827
Net income														—		—		—		—		—			2,082			—			2,082
Other comprehensive income														—		—		—		—		—			—			873			873
Stock compensation expense														—		—		—		90		—			—			—			90
Cash dividends declared on common stock ($0.29 per share)														—		—		—		—		—			(783	)		—			(783	)
Balance at March 31, 2019														421		3,785		3,501		46,491		(2,114	)		35,489			(5,484	)		82,089
Net income														—		—		—		—		—			2,140			—			2,140
Other comprehensive income														—		—		—		—		—			—			911			911
Cash dividends declared on preferred stock														—		—		—		—		—			(91	)		—			(91	)
Stock compensation expense														—		—		—		90		—			—			—			90
Cash dividends declared on common stock ($0.29 per share)														—		—		—		—		—			(782	)		—			(782	)
Balance at June 30, 2019														421		3,785		3,501		46,581		(2,114	)		36,756			(4,573	)		84,357
Net income														—		—		—		—		—			2,168			—			2,168
Other comprehensive income														—		—		—		—		—			—			97			97
Stock compensation expense														—		—		—		91		—			—			—			91
Cash dividends declared on common stock ($0.29 per share)														—		—		—		—		—			(782	)		—			(782	)
Balance at September 30, 2019													$	421	$	3,785	$	3,501	$	46,672	$	(2,114	)	$	38,142		$	(4,476	)	$	85,931

See accompanying notes to consolidated financial statements.

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Emclaire Financial Corp

Notes to Consolidated Financial Statements (Unaudited)

1.	Nature of Operations and Basis of Presentation

Emclaire Financial Corp (the Corporation) is a Pennsylvania corporation and the holding company of The Farmers National Bank of Emlenton (the Bank) and Emclaire Settlement Services, LLC (the Title Company). The Corporation provides a variety of financial services to individuals and businesses through its offices in western Pennsylvania and northern West Virginia. Its primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgages, commercial business loans and consumer loans.

The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries, the Bank and the Title Company. All significant intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.

The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Corporation’s consolidated financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s (SEC’s) Form 10-Q and Article 10 of Regulation S-X and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, ~~2017,~~2018, as contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 filed with the SEC.

The balance sheet at December 31, ~~2017~~2018 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.

The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim quarterly or year-to-date periods are not necessarily indicative of the results that may be expected for the entire year or any other period. Certain amounts previously reported may have been reclassified to conform to the current year’s financial statement presentation.

2.	~~Mergers and Acquisitions~~

On October 1, 2018, the Corporation completed its acquisition of Community First Bancorp, Inc. (Community First), and its banking subsidiary Community First Bank, a Pennsylvania bank headquartered in Reynoldsville, Pennsylvania.

Under the terms of the merger agreement, Community First merged into the Corporation and shareholders of Community First received 1.2008 shares of the Corporation's common stock and $6.95 in cash for each share of common stock of Community First or approximately $15.6 million in common stock and $2.4 million in cash in the aggregate. In addition, Community First Bank merged into the Bank.

The transaction added total consolidated assets, loans and deposits of approximately $121.0 million, $111.6 million and $106.5 million, respectively. Acquisition costs for the three and nine month periods were $677,000 and $1.0 million, respectively. It is anticipated that the Corporation will recognize approximately $2.6 million of additional merger costs during the fourth quarter. The initial accounting for the acquisition is incomplete as the fair value adjustments to the acquired assets and assumed liabilities are not finalized.

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3.2.	Earnings per Common Share

Basic earnings per common share (EPS) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of additional potential common shares for assumed issuance of restricted ~~stock and shares issued under stock options.~~stock.

The factors used in the Corporation’s earnings per common share computation follow:

(Dollar amounts in thousands, except for per share amounts)	For the three months ended				For the nine months ended				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	September 30,				September 30,				2019		2018		2019		2018
	2018		2017		2018		2017
Earnings per common share - basic
Earnings per common share
Net income	$	1,161	$	1,707	$	3,935	$	3,704	$	2,168	$	1,161	$	6,391	$	3,935
Less: Preferred stock dividends		-		-		-		-		—		—		91		—
Net income available to common stockholders	$	1,161	$	1,707	$	3,935	$	3,704	$	2,168	$	1,161	$	6,300	$	3,935
Average common shares outstanding		2,271,139		2,204,949		2,271,139		2,174,210		2,698,712		2,271,139		2,698,712		2,271,139
Add: Dilutive effects of restricted stock awards										20,816		20,147		17,245		17,584
Average shares and dilutive potential common shares										2,719,528		2,291,286		2,715,957		2,288,723
Basic earnings per common share	$	0.51	$	0.77	$	1.73	$	1.70	$	0.80	$	0.51	$	2.33	$	1.73
Earnings per common share - diluted
Net income available to common stockholders	$	1,161	$	1,707	$	3,935	$	3,704
Average common shares outstanding		2,271,139		2,204,949		2,271,139		2,174,210
Add: Dilutive effects of assumed issuance of restricted stock and exercise of stock options		20,147		15,471		17,584		16,437
Average shares and dilutive potential common shares		2,291,286		2,220,420		2,288,723		2,190,647
Diluted earnings per common share	$	0.51	$	0.77	$	1.72	$	1.69	$	0.80	$	0.51	$	2.32	$	1.72
Stock options not considered in computing earnings per share because they were antidilutive		-		-		-		-
Restricted stock awards not considered in computing earnings per share because they were antidulitive										—		—		—		—

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4.3.	Securities

Equity Securities

The Corporation held equity securities with fair values of ~~$473,000~~$23,000 and ~~$1.8 million~~$7,000 at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Beginning January 1, 2018, with the adoption of ASU 2016-01, changes in the fair value of these securities are included in other income on the consolidated statements of net income as opposed to accumulated other comprehensive loss on the consolidated balance sheets. During the three and nine months ended September 30, ~~2018,~~2019, the Corporation recognized a ~~loss~~ gain of ~~$1,000~~$6,000 and ~~a gain of $62,000, respectively,~~$16,000, respectively, on ~~the~~ equity securities held at September 30, ~~2018.~~2019, compared to a net loss of $1,000 and $7,000, respectively, for the same periods in 2018. During the three and nine months ended September 30, ~~2018,~~2019, the Corporation did not sell any equity securities. During the nine months ended September 30, 2018, the Corporation sold ~~$1.2~~$1.2 million ofof equity securities with a realized net ~~loss~~gain of ~~$25,000.~~$43,000.

Debt Securities - ~~Available for Sale~~Available-for-Sale

The following table summarizes the Corporation’s debt securities as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

(Dollar amounts in thousands)			Gross		Gross				Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available for sale:
September 30, 2018:
U.S. Treasury and federal agency	$	4,534	$	-	$	(139)	$	4,395
September 30, 2019:
U.S. Treasury									$	4,024	$	7	$	(5	)	$	4,026
U.S. government sponsored entities and agencies		17,058		-		(508)		16,550		8,085		18		(23	)		8,080
U.S. agency mortgage-backed securities: residential		28,526		-		(862)		27,664		44,200		378		(40	)		44,538
U.S. agency collateralized mortgage obligations: residential		20,171		36		(1,002)		19,205		30,714		105		(262	)		30,557
State and political subdivisions		22,943		3		(686)		22,260		20,703		241		(34	)		20,910
Corporate debt securities		7,520		1		(86)		7,435		9,713		97		(22	)		9,788
Total Securities available-for-sale	$	100,752	$	40	$	(3,283)	$	97,509
Total securities available-for-sale									$	117,439	$	846	$	(386	)	$	117,899

December 31, 2017:
U.S. Treasury and federal agency	$	4,541	$	-	$	(69)	$	4,472
December 31, 2018:
U.S. Treasury									$	4,532	$	—	$	(87	)	$	4,445
U.S. government sponsored entities and agencies		14,136		2		(212)		13,926		17,052		30		(299	)		16,783
U.S. agency mortgage-backed securities: residential		20,904		7		(153)		20,758		27,666		—		(490	)		27,176
U.S. agency collateralized mortgage obligations: residential		22,607		25		(708)		21,924		19,440		34		(810	)		18,664
State and political subdivisions		29,249		87		(96)		29,240		22,943		13		(224	)		22,732
Corporate debt securities		9,009		38		(17)		9,030		8,006		9		(97	)		7,918
Total Securities available-for-sale	$	100,446	$	159	$	(1,255)	$	99,350

Total securities available-for-sale									$	99,639	$	86	$	(2,007	)	$	97,718

The following table summarizes scheduled maturities of the Corporation’s debt securities as of September 30, ~~2018.~~2019. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are not due at a single maturity and are shown separately.

(Dollar amounts in thousands)	Available for sale				Available-for-sale
	Amortized		Fair
	Cost		Value
					Amortized Cost		Fair Value
Due in one year or less	$	1,924	$	1,912	$	1,264	$	1,261
Due after one year through five years		30,077		29,308		14,452		14,489
Due after five through ten years		15,305		14,803		12,109		12,283
Due after ten years		4,749		4,617		14,700		14,771
Mortgage-backed securities: residential		28,526		27,664		44,200		44,538
Collateralized mortgage obligations: residential	��	20,171		19,205		30,714		30,557
Total	$	100,752	$	97,509
Total securities available-for-sale					$	117,439	$	117,899

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4.3.	Securities (continued)

Information pertaining to debt securities with gross unrealized losses at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position are included in the table below:

(Dollar amounts in thousands)	Less than 12 Months				12 Months or More				Total				Less than 12 Months					12 Months or More					Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

September 30, 2018:
U.S. Treasury and federal agency	$	-	$	-	$	4,395	$	(139)	$	4,395	$	(139)
September 30, 2019:
U.S. Treasury													$	—	$	—		$	2,001	$	(5	)	$	2,001	$	(5	)
U.S. government sponsored entities and agencies		7,796		(134)		8,754		(374)		16,550		(508)		—		—			6,062		(23	)		6,062		(23	)
U.S. agency mortgage-backed securities: residential		21,938		(600)		5,726		(262)		27,664		(862)		10,940		(34	)		3,557		(6	)		14,497		(40	)
U.S. agency collateralized mortgage obligations: residential		1,500		(5)		15,870		(997)		17,370		(1,002)		6,773		(58	)		12,485		(204	)		19,258		(262	)
State and political subdivisions		17,386		(514)		4,325		(172)		21,711		(686)		4,642		(34	)		—		—			4,642		(34	)
Corporate debt securities		2,936		(68)		484		(18)		3,420		(86)		2,702		(11	)		488		(11	)		3,190		(22	)
Total	$	51,556	$	(1,321)	$	39,554	$	(1,962)	$	91,110	$	(3,283)	$	25,057	$	(137	)	$	24,593	$	(249	)	$	49,650	$	(386	)
December 31, 2017:
U.S. Treasury and federal agency	$	-	$	-	$	4,472	$	(69)	$	4,472	$	(69)

December 31, 2018:
U.S. Treasury													$	—	$	—		$	4,445	$	(87	)	$	4,445	$	(87	)
U.S. government sponsored entities and agencies		3,447		(42)		8,975		(170)		12,422		(212)		2,472		(30	)		10,337		(269	)		12,809		(299	)
U.S. agency mortgage-backed securities: residential		9,659		(48)		6,581		(105)		16,240		(153)		19,483		(297	)		7,693		(193	)		27,176		(490	)
U.S. agency collateralized mortgage obligations: residential		954		(16)		19,147		(692)		20,101		(708)		1,443		(5	)		15,388		(805	)		16,831		(810	)
State and political subdivisions		10,510		(60)		3,487		(36)		13,997		(96)		7,061		(67	)		10,083		(157	)		17,144		(224	)
Corporate debt securities		2,992		(16)		999		(1)		3,991		(17)		962		(38	)		2,448		(59	)		3,410		(97	)
Total	$	27,562	$	(182)	$	43,661	$	(1,073)	$	71,223	$	(1,255)	$	31,421	$	(437	)	$	50,394	$	(1,570	)	$	81,815	$	(2,007	)

~~Gains/~~Gains and losses on sales of securities for the three and nine months ended September 30, were as follows:

(Dollar amounts in thousands)	For the three months				For the nine months				For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	ended September 30,				ended September 30,				2019			2018			2019			2018
	2018		2017		2018		2017
Proceeds	$	5,888	$	-	$	12,683	$	18,195	$	8,153		$	5,888		$	21,035		$	12,683
(Losses) Gains		(4)		-		(34)		350
Tax provision related to gains		(1)		-		(7)		119
Gains										45			3			80			17
Losses										(3	)		(5	)		(37	)		(26	)
Tax provision related to gains (losses)										9			(1	)		9			(2	)

Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other conditions warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Corporation intends to sell an impaired security, or if it is more likely than not the Corporation will be required to sell the security before its anticipated recovery, the Corporation records an other-than-temporary loss in an amount equal to the entire difference between fair value and amortized cost. Otherwise, only the credit portion of the estimated loss on debt securities is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.

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4.	~~Securities (continued)~~

There were ~~133~~52 debt securities in an unrealized loss position as of September 30, ~~2018,~~2019, 35 of which 56 were in an unrealized loss position for more than 12 months. Of these 5635 securities, 2423 were ~~government-backed~~ collateralized mortgage obligations ~~12 were state and political subdivision securities, eight~~(issued by U.S. government sponsored entities), five were U.S. government sponsored ~~entity~~entities and agency securities, ~~six~~four were mortgage-backed securities, ~~five~~two were U.S. Treasury securities and one was a corporate security. The unrealized losses associated with these securities were not due to the deterioration in the credit quality of the issuer that would likely result in the non-collection of contractual principal and interest, but rather have been caused by a rise in interest rates from the time the securities were purchased. Based on that evaluation and other general considerations, and given that the Corporation’s current intention is not to sell any impaired securities and it is more likely than not it will not be required to sell these securities before the recovery of ~~its~~their amortized cost basis, the Corporation does not consider these debt securities with unrealized losses as of September 30, ~~2018~~2019 to be other-than-temporarily impaired.

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5.4.	Loans Receivable and Related Allowance for Loan Losses

The Corporation’s loans receivable as of the respective dates are summarized as follows:

(Dollar amounts in thousands)	September 30,		December 31,		September 30, 2019		December 31, 2018
	2018		2017

Mortgage loans on real estate:
Residential first mortgages	$	237,106	$	221,823	$	287,437	$	295,405
Home equity loans and lines of credit		99,668		99,940		98,628		103,752
Commercial real estate		200,169		193,068		227,569		238,734
Total		536,943		514,831
Total real estate loans						613,634		637,891
Other loans:
Commercial business		52,594		58,941		69,834		66,009
Consumer		8,948		9,589		11,398		11,272
Total		61,542		68,530
Total other loans						81,232		77,281
Total loans, gross		598,485		583,361		694,866		715,172
Less allowance for loan losses		6,360		6,127		6,509		6,508
Total loans, net	$	592,125	$	577,234	$	688,357	$	708,664

Included in total loans above are net deferred costs of ~~$1.9~~$2.3 million and ~~$1.5~~$2.2 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of nonperforming loans.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

The allowance for loan losses is based on estimates and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

At September 30, ~~2018,~~2019, there was no allowance for loan losses allocated to loans acquired ~~in the April 2016 acquisition of~~from United American Savings Bank ~~or the September 2017 acquisition of~~(2016), Northern Hancock Bank and Trust Co. (2017) or Community First Bancorp, Inc (2018).

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5.4.	Loans Receivable and Related Allowance for Loan Losses (continued)

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method:

~~(Dollar amounts in thousands)~~

(Dollar amounts in thousands)													Residential Mortgages			Home Equity & Lines of Credit			Commercial Real Estate			Commercial Business			Consumer			Total
Three months ended September 30, 2019:
Allowance for loan losses:
Beginning Balance													$	2,225		$	642		$	3,043		$	615		$	55		$	6,580
Charge-offs														—			(22	)		(8	)		—			(39	)		(69	)
Recoveries														—			4			104			—			35			143
Provision														16			11			(185	)		5			8			(145	)
Ending Balance													$	2,241		$	635		$	2,954		$	620		$	59		$	6,509
			Home Equity																				��
Nine months ended September 30, 2019:
Allowance for loan losses:
Beginning Balance													$	2,198		$	648		$	3,106		$	500		$	56		$	6,508
Charge-offs														(204	)		(56	)		(36	)		(134	)		(114	)		(544	)
Recoveries														40			5			132			—			63			240
Provision														207			38			(248	)		254			54			305
Ending Balance													$	2,241		$	635		$	2,954		$	620		$	59		$	6,509
	Residential		& Lines		Commercial		Commercial
At September 30, 2019:
Ending ALL balance attributable to loans:
Individually evaluated for impairment													$	4		$	—		$	—		$	—		$	—		$	4
Acquired loans collectively evaluated for impairment														—			—			—			—			—			—
Originated loans collectively evaluated for impairment														2,237			635			2,954			620			59			6,505
Total													$	2,241		$	635		$	2,954		$	620		$	59		$	6,509
Total loans:
Individually evaluated for impairment													$	366		$	4		$	2,471		$	40		$	—		$	2,881
Acquired loans collectively evaluated for impairment														64,037			11,432			45,619			9,425			2,227			132,740
Originated loans collectively evaluated for impairment														223,034			87,192			179,479			60,369			9,171			559,245
Total													$	287,437		$	98,628		$	227,569		$	69,834		$	11,398		$	694,866

At December 31, 2018:
Ending ALL balance attributable to loans:
Individually evaluated for impairment													$	12		$	—		$	—		$	—		$	—		$	12
Acquired loans collectively evaluated for impairment														—			—			—			—			—			—
Originated loans collectively evaluated for impairment														2,186			648			3,106			500			56			6,496
Total													$	2,198		$	648		$	3,106		$	500		$	56		$	6,508
Total loans:
Individually evaluated for impairment													$	389		$	6		$	34		$	39		$	—		$	468
Acquired loans collectively evaluated for impairment														72,654			13,750			56,690			12,974			3,306			159,374
Originated loans collectively evaluated for impairment														222,362			89,996			182,010			52,996			7,966			555,330
Total													$	295,405		$	103,752		$	238,734		$	66,009		$	11,272		$	715,172
	Mortgages		of Credit		Real Estate		Business		Consumer		Total
Three months ended September 30, 2018:
Allowance for loan losses:
Beginning Balance	$	2,033	$	650	$	2,882	$	499	$	54	$	6,118	$	2,033		$	650		$	2,882		$	499		$	54		$	6,118
Charge-offs		-		(26)		(6)		-		(44)		(76)		—			(26	)		(6	)		—			(44	)		(76	)
Recoveries		-		1		13		-		4		18		—			1			13			—			4			18
Provision		128		34		81		11		46		300		128			34			81			11			46			300
Ending Balance	$	2,161	$	659	$	2,970	$	510	$	60	$	6,360	$	2,161		$	659		$	2,970		$	510		$	60		$	6,360

Nine months ended September 30, 2018:
Allowance for loan losses:
Beginning Balance	$	2,090	$	646	$	2,753	$	585	$	53	$	6,127	$	2,090		$	646		$	2,753		$	585		$	53		$	6,127
Charge-offs		(61)		(109)		(424)		-		(213)		(807)		(61	)		(109	)		(424	)		—			(213	)		(807	)
Recoveries		3		12		32		1		12		60		3			12			32			1			12			60
Provision		129		110		609		(76)		208		980		129			110			609			(76	)		208			980
Ending Balance	$	2,161	$	659	$	2,970	$	510	$	60	$	6,360	$	2,161		$	659		$	2,970		$	510		$	60		$	6,360

At September 30, 2018:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	7	$	-	$	-	$	-	$	-	$	7
Acquired loans		-		-		-		-		-		-
Collectively evaluated for impairment		2,154		659		2,970		510		60		6,353
Total	$	2,161	$	659	$	2,970	$	510	$	60	$	6,360
Total loans:
Individually evaluated for impairment	$	401	$	6	$	2,512	$	39	$	-	$	2,958
Acquired loans		17,767		9,817		22,784		1,778		1,080		53,226
Collectively evaluated for impairment		218,938		89,845		174,873		50,777		7,868		542,301
Total	$	237,106	$	99,668	$	200,169	$	52,594	$	8,948	$	598,485

At December 31, 2017:
Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	7	$	-	$	-	$	-	$	-	$	7
Acquired loans		-		-		-		-		-		-
Collectively evaluated for impairment		2,083		646		2,753		585		53		6,120
Total	$	2,090	$	646	$	2,753	$	585	$	53	$	6,127
Total loans:
Individually evaluated for impairment	$	425	$	8	$	914	$	569	$	-	$	1,916
Acquired loans		20,300		10,873		27,404		1,451		2,893		62,921
Collectively evaluated for impairment		201,098		89,059		164,750		56,921		6,696		518,524
Total	$	221,823	$	99,940	$	193,068	$	58,941	$	9,589	$	583,361

Three months ended September 30, 2017:
Allowance for loan losses:
Beginning Balance	$	1,994	$	639	$	2,460	$	621	$	53	$	5,767
Charge-offs		(2)		(33)		(36)		(4)		(26)		(101)
Recoveries		-		1		2		-		1		4
Provision		46		20		200		(21)		25		270
Ending Balance	$	2,038	$	627	$	2,626	$	596	$	53	$	5,940

Nine months ended September 30, 2017:
Allowance for loan losses:
Beginning Balance	$	1,846	$	633	$	2,314	$	700	$	52	$	5,545
Charge-offs		(38)		(44)		(126)		(14)		(53)		(275)
Recoveries		-		21		6		-		10		37
Provision		230		17		432		(90)		44		633
Ending Balance	$	2,038	$	627	$	2,626	$	596	$	53	$	5,940

Table of Contents

5.4.	Loans Receivable and Related Allowance for Loan Losses (continued)

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, ~~2018:~~2019:

~~(Dollar amounts in thousands)~~

	Impaired Loans with Specific Allowance
							For the three months
	As of September 30, 2018						ended September 30, 2018
											Cash Basis
(Dollar amounts in thousands)
	Unpaid						Average		Interest Income		Interest		Impaired Loans with Specific Allowance
	Principal		Recorded		Related		Recorded		Recognized		Recognized		As of September 30, 2019						For three months ended September 30, 2019
	Balance		Investment		Allowance		Investment		in Period		in Period		Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	74	$	74	$	7	$	74	$	1	$	1	$	72	$	72	$	4	$	72	$	1	$	1
Home equity and lines of credit		6		6		-		7		-		-		4		4		—		5		—		—
Commercial real estate		-		-		-		-		-		-		—		—		—		—		—		—
Commercial business		-		-		-		-		-		-		—		—		—		—		—		—
Consumer		-		-		-		-		-		-		—		—		—		—		—		—
Total	$	80	$	80	$	7	$	81	$	1	$	1	$	76	$	76	$	4	$	77	$	1	$	1

	For the nine months
	ended September 30, 2018
					Cash Basis
	Average		Interest Income		Interest
	Recorded		Recognized		Recognized		For the nine months ended September 30, 2019
	Investment		in Period		in Period		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	75	$	2	$	2	$	73	$	3	$	3
Home equity and lines of credit		7		-		-		5		—		—
Commercial real estate		-		-		-		—		—		—
Commercial business		-		-		-		16		—		—
Consumer		-		-		-		—		—		—
Total	$	82	$	2	$	2	$	94	$	3	$	3

	Impaired Loans with No Specific Allowance
					For the three months
	As of September 30, 2018				ended September 30, 2018
									Cash Basis
	Unpaid				Average		Interest Income		Interest		Impaired Loans with No Specific Allowance
	Principal		Recorded		Recorded		Recognized		Recognized		As of September 30, 2019				For three months ended September 30, 2019
	Balance		Investment		Investment		in Period		in Period		Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	438	$	327	$	330	$	2	$	2	$	369	$	294	$	298	$	2	$	2
Home equity and lines of credit		-		-		-		-		-		—		—		—		—		—
Commercial real estate		2,512		2,512		1,278		83		2		2,471		2,471		2,475		34		33
Commercial business		39		39		39		1		1		40		40		139		—		—
Consumer		-		-		-		-		-		—		—		—		—		—
Total	$	2,989	$	2,878	$	1,647	$	86	$	5	$	2,880	$	2,805	$	2,912	$	36	$	35

	For the nine months
	ended September 30, 2018
					Cash Basis
	Average		Interest Income		Interest
	Recorded		Recognized		Recognized		For the nine months ended September 30, 2019
	Investment		in Period		in Period		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	338	$	3	$	3	$	305	$	3	$	3
Home equity and lines of credit		-		-		-		—		—		—
Commercial real estate		952		125		42		1,254		87		34
Commercial business		300		74		74		89		7		2
Consumer		-		-		-		—		—		—
Total	$	1,590	$	202	$	119	$	1,648	$	97	$	39

Table of Contents

5.4.	Loans Receivable and Related Allowance for Loan Losses (continued)

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of December 31, 2018						For the year ended December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	74	$	74	$	12	$	74	$	2	$	2
Home equity and lines of credit		6		6		—		7		—		—
Commercial real estate		—		—		—		—		—		—
Commercial business		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	80	$	80	$	12	$	81	$	2	$	2

	Impaired Loans with No Specific Allowance
	As of December 31, 2018				For the year ended December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	427	$	315	$	334	$	5	$	5
Home equity and lines of credit		—		—		—		—		—
Commercial real estate		34		34		768		156		73
Commercial business		39		39		248		74		74
Consumer		—		—		—		—		—
Total	$	500	$	388	$	1,350	$	235	$	152

Table of Contents

4.	Loans Receivable and Related Allowance for Loan Losses (continued)

~~(Dollar amounts in thousands)~~

	Impaired Loans with Specific Allowance
							For the year ended
	As of December 31, 2017						December 31, 2017
											Cash Basis
(Dollar amounts in thousands)
	Unpaid						Average		Interest Income		Interest		Impaired Loans with Specific Allowance
	Principal		Recorded		Related		Recorded		Recognized		Recognized		As of September 30, 2018						For the three months ended September 30, 2018
	Balance		Investment		Allowance		Investment		in Period		in Period		Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	75	$	75	$	7	$	88	$	3	$	3	$	74	$	74	$	7	$	74	$	1	$	1
Home equity and lines of credit		8		8		-		2		-		-		6		6		—		7		—		—
Commercial real estate		-		-		-		111		-		-		—		—		—		—		—		—
Commercial business		-		-		-		118		-		-		—		—		—		—		—		—
Consumer		-		-		-		-		-		-		—		—		—		—		—		—
Total	$	83	$	83	$	7	$	319	$	3	$	3	$	80	$	80	$	7	$	81	$	1	$	1

Impaired Loans with No Specific Allowance

For the year ended

As of December 31, 2017

December 31, 2017

Cash Basis

Unpaid

Average

Interest Income

Interest

Principal

Recorded

Recorded

Recognized

Recognized

Balance

Investment

Investment

in Period

in Period
Residential first mortgages
$ 461 $ 350 $ 289 $ 8 $ 8
Home equity and lines of credit
- - - - -
Commercial real estate
1,089 914 855 3 3
Commercial business
569 569 498 3 3
Consumer
- - - - -
Total
$ 2,119 $ 1,833 $ 1,642 $ 14 $ 14

~~Table of Contents~~

5.	~~Loans Receivable and Related Allowance for Loan Losses (continued)~~

~~(Dollar amounts in thousands)~~

	Impaired Loans with Specific Allowance
							For the three months
	As of September 30, 2017						ended September 30, 2017
											Cash Basis
	Unpaid						Average		Interest Income		Interest
	Principal		Recorded		Related		Recorded		Recognized		Recognized		For the nine months ended September 30, 2018
	Balance		Investment		Allowance		Investment		in Period		in Period		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	76	$	76	$	8	$	76	$	-	$	-	$	75	$	2	$	2
Home equity and lines of credit		-		-		-		-		-		-		7		—		—
Commercial real estate		-		-		-		-		-		-		—		—		—
Commercial business		-		-		-		-		-		-		—		—		—
Consumer		-		-		-		-		-		-		—		—		—
Total	$	76	$	76	$	8	$	76	$	-	$	-	$	82	$	2	$	2

	For the nine months
	ended September 30, 2017
					Cash Basis
	Average		Interest Income		Interest		Impaired Loans with No Specific Allowance
	Recorded		Recognized		Recognized		As of September 30, 2018				For the three months ended September 30, 2018
	Investment		in Period		in Period		Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	91	$	2	$	2	$	438	$	327	$	330	$	2	$	2
Home equity and lines of credit		-		-		-		—		—		—		—		—
Commercial real estate		139		-		-		2,512		2,512		1,278		83		2
Commercial business		147		-		-		39		39		39		1		1
Consumer		-		-		-		—		—		—		—		—
Total	$	377	$	2	$	2	$	2,989	$	2,878	$	1,647	$	86	$	5

Impaired Loans with No Specific Allowance

For the three months

As of September 30, 2017

ended September 30, 2017
Cash Basis

Unpaid

Average

Interest Income

Interest

Principal

Recorded

Recorded

Recognized

Recognized

Balance

Investment

Investment

in Period

in Period
Residential first mortgages
$ 469 $ 357 $ 362 $ 1 $ 1
Home equity and lines of credit
- - - - -
Commercial real estate
1,113 939 957 1 1
Commercial business
585 585 592 1 1
Consumer
- - - - -
Total
$ 2,167 $ 1,881 $ 1,911 $ 3 $ 3

	For the nine months
	ended September 30, 2017
					Cash Basis
	Average		Interest Income		Interest
	Recorded		Recognized		Recognized		For the nine months ended September 30, 2018
	Investment		in Period		in Period		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	274	$	5	$	5	$	338	$	3	$	3
Home equity and lines of credit		-		-		-		—		—		—
Commercial real estate		840		2		2		952		125		42
Commercial business		481		2		2		300		74		74
Consumer		-		-		-		—		—		—
Total	$	1,595	$	9	$	9	$	1,590	$	202	$	119

~~Table of Contents~~

5.	~~Loans Receivable and Related Allowance for Loan Losses (continued)~~

Unpaid principal balance includes any loans that have been partially charged off but not forgiven. Accrued interest is not included in the recorded investment in loans presented above or in the tables that follow based on the amounts not being material.

Table of Contents

4.	Loans Receivable and Related Allowance for Loan Losses (continued)

Troubled debt restructurings (TDR). The Corporation has certain loans that have been modified in order to maximize collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, management grants a concession compared to the original terms and conditions of the loan that it would not have otherwise considered, the modified loan is classified as a TDR. Concessions related to TDRs generally do not include forgiveness of principal balances. The Corporation generally does not extend additional credit to borrowers with loans classified as TDRs.

At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Corporation had ~~$407,000~~$433,000 and ~~$433,000,~~$394,000, respectively, of loans classified as TDRs, which are included in impaired loans above. The Corporation had allocated ~~$7,000~~$4,000 and ~~$7,000~~$12,000 of specific allowance for these loans at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

During the three ~~and nine month periods~~months ended September 30, ~~2018~~ 2019, the Corporation did not modify any loans as TDRs. During the ~~three month period~~nine months ended September 30, ~~2017, the Corporation did not modify any loans as TDRs. During the nine month period ended September 30, 2017,~~2019, the Corporation modified the interest rate and extended the payment amortization on one ~~residential mortgage~~commercial real estate loan with a recorded investment of ~~$323,000 due to a bankruptcy order.~~$72,000. At September 30, ~~2017,~~2019, the Corporation did not have any specific allowance for loan losses allocated to this specific loan. During the three and nine months ended September 30, 2018, the Corporation did not modify any loans as TDRs.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the three and nine ~~month periods~~months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Corporation did not have any loans which were modified as TDRs for which there was a payment default within twelve months following the modification.

Credit Quality Indicators. Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.

Commercial real estate and commercial business loans not identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan’s performance status is reviewed.

Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit.

The reserve allocation for risk rated loan pools is developed by applying the following factors:

Historic: Management utilizes a computer model to develop the historical net charge-off experience which is used to formulate the assumptions employed in the migration analysis applied to estimate losses in the portfolio. Outstanding balance and charge-off information are input into the model and historical loss migration rate assumptions are developed to apply to pass, special mention, substandard and doubtful risk rated loans. A twelve-quarter rolling weighted-average is utilized to estimate probable incurred losses in the portfolios.

Qualitative: Qualitative adjustment factors for pass, special mention, substandard and doubtful ratings are developed and applied to risk rated loans to allow for: quality of lending policies and procedures; national and local economic and business conditions; changes in the nature and volume of the portfolio; experiences, ability and depth of lending management; changes in trends, volume and severity of past due, nonaccrual and classified loans and loss and recovery trends; quality of loan review systems; concentrations of credit and other external factors.

Table of Contents

4.	Loans Receivable and Related Allowance for Loan Losses (continued)

Management uses the following definitions for risk ratings:

Pass: Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have a sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions.

~~Table of Contents~~

5.	~~Loans Receivable and Related Allowance for Loan Losses (continued)~~

Special Mention: Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans may exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures.

Substandard: Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is no longer adequately protected by both the apparent net worth and repayment capacity of the borrower.

Doubtful: Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable.

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

~~(Dollar amounts in thousands)~~

(Dollar amounts in thousands)
					Special								Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
	Not Rated		Pass		Mention		Substandard		Doubtful		Total
September 30, 2018:
September 30, 2019:
Residential first mortgages	$	235,817	$	-	$	-	$	1,289	$	-	$	237,106	$	286,353	$	—	$	—	$	1,084	$	—	$	287,437
Home equity and lines of credit		98,647		-		-		1,021		-		99,668		97,956		—		—		672		—		98,628
Commercial real estate		-		189,273		3,785		7,111		-		200,169		—		211,535		3,381		12,653		—		227,569
Commercial business		-		51,381		150		1,063		-		52,594		—		66,935		204		2,695		—		69,834
Consumer		8,851		-		-		97		-		8,948		11,317		—		—		81		—		11,398
Total	$	343,315	$	240,654	$	3,935	$	10,581	$	-	$	598,485
Total loans													$	395,626	$	278,470	$	3,585	$	17,185	$	—	$	694,866

December 31, 2017:
December 31, 2018:
Residential first mortgages	$	220,730	$	-	$	-	$	1,093	$	-	$	221,823	$	293,919	$	—	$	—	$	1,486	$	—	$	295,405
Home equity and lines of credit		98,946		-		-		994		-		99,940		102,869		—		—		883		—		103,752
Commercial real estate		-		182,460		2,744		7,864		-		193,068		—		222,335		5,942		10,457		—		238,734
Commercial business		-		56,960		477		1,504		-		58,941		—		62,022		542		3,445		—		66,009
Consumer		9,443		-		-		146		-		9,589		11,157		—		—		115		—		11,272
Total	$	329,119	$	239,420	$	3,221	$	11,601	$	-	$	583,361
Total loans													$	407,945	$	284,357	$	6,484	$	16,386	$	—	$	715,172

Table of Contents

5.4.	Loans Receivable and Related Allowance for Loan Losses (continued)

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

~~(Dollar amounts in thousands)~~

(Dollar amounts in thousands)
	Performing						Nonperforming						Performing						Nonperforming
	Accruing		Accruing		Accruing		Accruing						Accruing Loans Not Past Due		Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing 90+ Days Past Due		Nonaccrual		Total
	Loans Not		30-59 Days		60-89 Days		90 Days +				Total
	Past Due		Past Due		Past Due		Past Due		Nonaccrual		Loans
September 30, 2018:
September 30, 2019:
Residential first mortgages	$	233,448	$	2,019	$	427	$	129	$	1,083	$	237,106	$	282,766	$	2,626	$	1,024	$	197	$	824	$	287,437
Home equity and lines of credit		97,716		906		146		379		521		99,668		97,361		438		187		110		532		98,628
Commercial real estate		196,184		737		8		-		3,240		200,169		222,078		2,172		126		—		3,193		227,569
Commercial business		52,233		322		-		-		39		52,594		69,653		76		65		—		40		69,834
Consumer		8,704		97		50		27		70		8,948		11,240		75		2		—		81		11,398
Total loans	$	588,285	$	4,081	$	631	$	535	$	4,953	$	598,485	$	683,098	$	5,387	$	1,404	$	307	$	4,670	$	694,866

December 31, 2017:
December 31, 2018:
Residential first mortgages	$	218,515	$	1,936	$	357	$	159	$	856	$	221,823	$	289,732	$	3,586	$	747	$	485	$	855	$	295,405
Home equity and lines of credit		98,112		598		370		334		526		99,940		101,920		707		351		287		487		103,752
Commercial real estate		190,451		1,026		430		197		964		193,068		232,865		5,013		231		19		606		238,734
Commercial business		58,058		74		225		-		584		58,941		65,538		50		247		—		174		66,009
Consumer		9,162		273		81		-		73		9,589		10,961		160		36		—		115		11,272
Total loans	$	574,298	$	3,907	$	1,463	$	690	$	3,003	$	583,361	$	701,016	$	9,516	$	1,612	$	791	$	2,237	$	715,172

~~Table of Contents~~

5.	~~Loans Receivable and Related Allowance for Loan Losses (continued)~~

The following table presents the Corporation’s nonaccrual loans by aging category as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

~~(Dollar amounts in thousands)~~

(Dollar amounts in thousands)
	Not		30-59 Days		60-89 Days		90 Days +		Total		Not Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total
	Past Due		Past Due		Past Due		Past Due		Loans

September 30, 2018:
September 30, 2019:
Residential first mortgages	$	346	$	-	$	74	$	663	$	1,083	$	315	$	72	$	—	$	437	$	824
Home equity and lines of credit		7		-		-		514		521		4		—		—		528		532
Commercial real estate		2,665		-		268		307		3,240		135		454		45		2,559		3,193
Commercial business		39		-		-		-		39		40		—		—		—		40
Consumer		-		-		-		70		70		—		—		—		81		81
Total loans	$	3,057	$	-	$	342	$	1,554	$	4,953	$	494	$	526	$	45	$	3,605	$	4,670

December 31, 2017:
December 31, 2018:
Residential first mortgages	$	366	$	-	$	75	$	415	$	856	$	335	$	—	$	74	$	446	$	855
Home equity and lines of credit		8		-		-		518		526		6		—		—		481		487
Commercial real estate		341		-		-		623		964		111		265		—		230		606
Commercial business		569		-		-		15		584		—		—		39		135		174
Consumer		-		-		-		73		73		—		—		—		115		115
Total loans	$	1,284	$	-	$	75	$	1,644	$	3,003	$	452	$	265	$	113	$	1,407	$	2,237

Table of Contents

6.5.	Goodwill and Intangible Assets

The following table summarizes the Corporation’s acquired goodwill and intangible assets as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

(Dollar amounts in thousands)	September 30, 2018				December 31, 2017				September 30, 2019				December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Goodwill	$	10,288	$	-	$	10,288	$	-	$	19,460	$	—	$	19,448	$	—
Core deposit intangibles		4,426		4,148		4,426		3,945		5,634		4,345		5,634		4,211
Total	$	14,714	$	4,148	$	14,714	$	3,945	$	25,094	$	4,345	$	25,082	$	4,211

Goodwill resulted from ~~four~~five acquisitions. Goodwill represents the excess of the total purchase price paid for the acquisitions over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. The Corporation has selected November 30 as the date to perform the annual impairment test. No goodwill impairment charges were recorded during ~~2017~~2018 or in the first nine months of ~~2018.~~2019.

The core deposit intangible asset, resulting from three acquisitions, is amortized ~~using the double declining balance method~~ over a weighted average estimated life of the related deposits and is not estimated to have a significant residual value. During the three and nine ~~month periods ending~~months ended September 30, ~~2018~~2019, the Corporation recorded intangible amortization expense totaling ~~$67,000~~$44,000 and ~~$203,000,~~$134,000, respectively, compared to ~~$58,000~~$67,000 and ~~$177,000,~~$203,000, respectively, for the same periods in ~~2017.~~2018.

~~Table of Contents~~

7.6.	Stock Compensation Plan

In April 2014, the Corporation adopted the 2014 Stock Incentive Plan (the ~~2014~~ Plan), which ~~is shareholder~~was approved by shareholders and permits the grant of restricted stock awards and options to its directors, officers and employees for up to 176,866 shares of common stock. As of September 30, ~~2018, 52,533~~2019, 37,783 shares of restricted stock and 88,433 stock options remain available for issuance under the ~~plan.~~Plan.

Incentive stock options, non-incentive or compensatory stock options and share awards may be granted under the Plan. The exercise price of each option shall at least equal the market price of a share of common stock on the date of grant and have a contractual term of ten years. Options shall vest and become exercisable at the rate, to the extent and subject to such limitations as may be specified by the Corporation. Compensation cost related to share-based payment transactions must be recognized in the financial statements with measurement based upon the fair value of the equity instruments issued.

At September 30, ~~2018~~2019, there ~~are~~were no options that were granted or outstanding under the Plan.

A summary of the status of the Corporation’s nonvested restricted stock awards as of September 30, ~~2018,~~2019, and changes during the period then ended is presented below:

			Weighted-Average		Shares		Weighted-Average Grant-date Fair Value
	Shares		Grant-date Fair Value
Nonvested at January 1, 2018		33,400	$	27.70
Nonvested at January 1, 2019						37,250	$	29.94
Granted		-		-		—		—
Vested		-		-		—		—
Forfeited		(2,500)		27.17		—		—
Nonvested as of September 30, 2018		30,900	$	27.74
Nonvested as of September 30, 2019						37,250	$	29.94

For the three and nine ~~month periods~~months ended September 30, ~~2018,~~2019, the Corporation recognized stock compensation expense of $90,000 and $271,000, respectively, compared to $37,000 and $187,000, respectively ~~compared to $55,000 and $164,000, respectively,~~ for the same ~~period~~periods in ~~2017.~~2018. As of September 30, ~~2018,~~2019, there was ~~$411,000~~$513,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over the next three years. It is the Corporation’s policy to issue shares on the vesting date for restricted stock awards. Unvested restricted stock awards do not receive dividends declared by the Corporation.

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8.7.	Fair Value

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction or exit price on the date indicated. The estimated fair value amounts have been measured as of their respective ~~dates~~year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported.

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value.

~~Level 1~~~~: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Corporation has the ability to access~~Assets measured at ~~the measurement date.~~

~~Level 2~~: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

~~Level 3~~~~: Significant unobservable inputs that reflect the Corporation’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.~~

~~Table of Contents~~

8.	~~Fair Value (continued)~~

~~An asset or liability’s level is based on the lowest level of input that is significant to the~~ fair value ~~measurement.~~

on a recurring basis. The Corporation used the following methods and significant assumptions to estimate the fair value of ~~each type of financial instrument:~~the following assets:

~~Securities (debt-available for sale, equities)~~Debt securities available-for-sale, equity securities – The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. If available, investment securities are determined by quoted market prices (Level 1). Level 1 includes U.S. Treasury, federal agency securities and certain equity securities. For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). Level 2 includes U.S. Government sponsored entities and agencies, mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities and certain corporate debt securities. For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using unobservable inputs (Level 3) and may include certain corporate debt and equity securities held by the Corporation.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

(Dollar amounts in thousands)			(Level 1)		(Level 2)		(Level 3)
Description	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2019:
Securities available-for-sale
U.S. Treasury	$	4,026	$	4,026	$	—	$	—
U.S. government sponsored entities and agencies		8,080		—		8,080		—
U.S. agency mortgage-backed securities: residential		44,538		—		44,538		—
U.S. agency collateralized mortgage obligations: residential		30,557		—		30,557		—
State and political subdivision		20,910		—		20,910		—
Corporate debt securities		9,788		—		6,288		3,500
Total available-for-sale securities	$	117,899	$	4,026	$	110,373	$	3,500

Equity securities	$	23	$	23	$	—	$	—

December 31, 2018:
Securities available-for-sale
U.S. Treasury	$	4,445	$	4,445	$	—	$	—
U.S. government sponsored entities and agencies		16,783		—		16,783		—
U.S. agency mortgage-backed securities: residential		27,176		—		27,176		—
U.S. agency collateralized mortgage obligations: residential		18,664		—		18,664		—
State and political subdivisions		22,732		—		22,732		—
Corporate debt securities		7,918		—		4,418		3,500
Total available-for-sale securities	$	97,718	$	4,445	$	89,773	$	3,500

Equity securities	$	7	$	7	$	—	$	—

The Corporation’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. During the nine months ended September 30, 2019, the Corporation reclassified one corporate security from Level 3 to Level 2. For the same period in 2018, the Corporation reclassified a restricted bank stock from the equity security portfolio to other assets and certain corporate ~~debt~~ securities ~~consist~~from Level 3 to Level 2. Also during 2018, the Corporation sold $25,000 in equity securities from Level 3.

Table of ~~certain subordinated notes which are priced~~Contents

7.	Fair Value (continued)

The following table presents changes in Level 3 assets measured on a recurring basis for the three and nine month periods ended September 30, 2019 and 2018:

(Dollar amounts in thousands)	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019			2018
Balance at the beginning of the period	$	3,000	$	3,500	$	3,500		$	8,132
Total gains or losses (realized/unrealized):
Included in earnings		—		—		—			1
Included in other comprehensive income		—		—		—			—
Purchased into Level 3		500		—		500			—
Sold out of Level 3		—		—		—			(25	)
Transfers in and/or out of Level 3		—		—		(500	)		(4,608	)
Balance at the end of the period	$	3,500	$	3,500	$	3,500		$	3,500

Assets measured at ~~par because management has determined that~~fair value on a non-recurring basis. The Corporation used the ~~par value approximates~~following methods and significant assumptions to estimate the fair value of ~~these instruments. The Level 3 equity security valuations were supported by an analysis prepared by~~ the Corporation which relies on inputs such as the security issuer’s publicly attainable financial information, multiples derived from prices in observed transactions involving comparable businesses and other market, financial and nonfinancial factors.following assets:

Impaired loans – At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive a specific allowance for loan losses. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Corporation did not have any impaired loans carried at fair value measured using the fair value of collateral. ~~There~~During the three month period ended September 30, 2019 there was no additional provision for loan losses recorded for impaired loans. There was additional provision for loan losses recorded for impaired loans of $63,000 during the nine month period ended September 30, 2019, however, the loan was charged-off prior to the end of the second quarter. There were no additional provisions recorded for impaired loans during the ~~three and nine month~~same periods ~~ended September 30,~~ in 2018 ~~and 2017.~~.

Other real estate owned(OREO) – Assets acquired through or instead of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. As of September 30, ~~2018~~2019 and ~~December 31, 2017,~~2018, respectively, the Corporation ~~did not have any~~had no OREO measured at fair value. During the three month periods ended September 30, 2019 and 2018, there was no expense recorded associated with the write-down of OREO. During the nine month periods ended September 30, 2019 and 2018, there was expense recorded of $35,000 and $11,000, respectively. The related properties were sold prior to the end of the respective reporting periods. As of December 31, 2018, OREO measured at fair value less costs to sell had a net carrying amount of $160,000, which consisted of the outstanding balance of $415,000 less write-downs of $255,000.

Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed by the Corporation. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Corporation compares the actual selling price of OREO that has been sold to the most recent ~~appraisal~~appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. The most recent analysis performed indicated that a discount of 10% should be applied.

~~Table of Contents~~

8.	~~Fair Value (continued)~~

For assets measured at fair value on a ~~recurring~~non-recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

(Dollar amounts in thousands)

(Level 1)

(Level 2)

Quoted Prices in

Significant

(Level 3)

Active Market

Other

Significant

for Identical

Observable

Unobservable
Description

Total

Assets

Inputs

Inputs
September 30, 2018:

Securities available for sale

U.S. Treasury and federal agency
$ 4,395 $ 4,395 $ - $ -
U.S. government sponsored entities and agencies
16,550 - 16,550 -
U.S. agency mortgage-backed securities: residential
27,664 - 27,664 -
U.S. agency collateralized mortgage obligations: residential
19,205 - 19,205 -
State and political subdivision
22,260 - 22,260 -
Corporate debt securities
7,435 - 3,935 3,500
Total $ 97,509 $ 4,395 $ 89,614 $ 3,500

Equity securities
$ 473 $ 473 $ - $ -

December 31, 2017:

Securities available for sale

U.S. Treasury and federal agency
$ 4,472 $ 4,472 $ - $ -
U.S. government sponsored entities and agencies
13,926 - 13,926 -
U.S. agency mortgage-backed securities: residential
20,758 - 20,758 -
U.S. agency collateralized mortgage obligations: residential
21,924 - 21,924 -
State and political subdivisions
29,240 - 29,240 -
Corporate debt securities
9,030 - 1,032 7,998
Total $ 99,350 $ 4,472 $ 86,880 $ 7,998

Equity securities
$ 1,817 $ 1,683 $ - $ 134

(Dollar amounts in thousands)			(Level 1)		(Level 2)		(Level 3)
Description	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
December 31, 2018:
Other real estate owned	$	160	$	—	$	—	$	160
Total	$	160	$	—	$	—	$	160

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Table of Contents

8.7.	Fair Value (continued)

The Corporation’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. During the nine month period ended September 30, 2018 the Corporation reclassified a restricted bank stock from the equity security portfolio to other assets and certain corporate securities from Level 3 to Level 2. Also during the nine month period, $25,000 in Level 3 equity securities were sold from the portfolio. For the same period in 2017, the Corporation had no transfers between levels. The following table presents ~~changes in~~quantitative information about Level 3 ~~assets measured on a recurring basis~~fair value measurements for ~~the three and nine month periods ended September 30, 2018 and 2017:~~

(Dollar amounts in thousands)

Three months ended

Nine months ended

September 30,

September 30,

2018

2017

2018

2017
Balance at the beginning of the period
$ 3,500 $ 135 $ 8,132 $ 136
Total gains or losses (realized/unrealized):
- - - -
Included in earnings
- - 1 -
Included in other comprehensive income
- (1) - (2)
Acquired
- - - -
Sold out of Level 3 - - (25) -
Transfers in and/or out of Level 3
- - (4,608) -
Balance at the end of the period
$ 3,500 $ 134 $ 3,500 $ 134

~~The Corporation had no OREO~~ assets measured at fair value on a non-recurring ~~basis at~~ basis:

(Dollar amounts in thousands)			Valuation	Unobservable	Weighted
			Techniques(s)	Input (s)	Average
December 31, 2018:
Other real estate owned	$	160	Sales comparison approach	Adjustment for differences between comparable sales		10	%

At September 30, ~~2018~~2019 and December 31, ~~2017.~~

~~The Corporation had~~2018 was an impaired residential mortgage loan totaling ~~$62,000~~$68,000 and $61,000, respectively, and an impaired home equity loan totaling $4,000 and $6,000, ~~at September 30, 2018~~respectively, which were classified as TDRs and measured using a discounted cash flow methodology. ~~At December 31, 2017 these loans were valued at $68,000 and $8,000, respectively.~~

~~Table of Contents~~

8.	~~Fair Value (continued)~~

The following table sets forth the carrying amount and ~~estimated~~ fair ~~values~~value of the Corporation’s financial instruments included in the consolidated balance ~~sheet as of September 30, 2018 and December 31, 2017:~~sheet:

(Dollar amounts in thousands)
	Carrying		Fair Value Measurements using:								Carrying		Fair Value Measurements using:
Description	Amount		Total		Level 1		Level 2		Level 3		Amount		Total		Level 1		Level 2		Level 3
September 30, 2018:
September 30, 2019:
Financial Assets:
Cash and cash equivalents	$	22,680	$	22,680	$	22,680	$	-	$	-	$	49,302	$	49,302	$	49,302	$	—	$	—
Securities-available for sale		97,509		97,509		4,395		89,614		3,500
Securities-equities		473		473		473		-		-
Interest earning time deposits												10,198		10,198		—		10,198		—
Securities - available-for-sale												117,899		117,899		4,026		110,373		3,500
Securities - equities												23		23		23		—		—
Loans held for sale		120		120		-		120		-		154		154		—		154		—
Loans, net		592,125		583,741		-		-		583,741		688,357		682,392		—		—		682,392
Federal bank stock		4,466		N/A		N/A		N/A		N/A		5,856		N/A		N/A		N/A		N/A
Accrued interest receivable		2,302		2,302		88		353		1,861		2,754		2,754		122		442		2,190
Total	$	719,675	$	706,825	$	27,636	$	90,087	$	589,102	$	874,542	$	862,722	$	53,473	$	121,167	$	688,082
Financial Liabilities:
Deposits		682,361		685,333		513,011		172,322		-		808,025		814,778		580,820		233,958		—
Borrowed funds		19,800		19,414		-		19,414		-		33,800		34,417		—		34,417		—
Accrued interest payable		460		460		38		422		-		652		652		50		602		—
Total	$	702,621	$	705,207	$	513,049	$	192,158	$	-	$	842,477	$	849,847	$	580,870	$	268,977	$	—

	Carrying		Fair Value Measurements using:								Carrying		Fair Value Measurements using:
	Amount		Total		Level 1		Level 2		Level 3		Amount		Total		Level 1		Level 2		Level 3
December 31, 2017:
December 31, 2018:
Financial Assets:
Cash and cash equivalents	$	14,374	$	14,374	$	14,374	$	-	$	-	$	10,955	$	10,955	$	10,955	$	—	$	—
Securities-available for sale		99,350		99,350		4,472		86,880		7,998
Securities-equities		1,817		1,817		1,683		-		134
Interest earning time deposits												6,738		6,738		—		6,738		—
Securities - available-for-sale												97,718		97,718		4,445		89,773		3,500
Securities - equities												7		7		7		—		—
Loans held for sale		504		504		-		504		-		—		—		—		—		—
Loans, net		577,234		577,616		-		-		577,616		708,664		702,747		—		—		702,747
Federal bank stock		4,662		N/A		N/A		N/A		N/A		6,351		N/A		N/A		N/A		N/A
Accrued interest receivable		2,217		2,217		59		338		1,820		2,570		2,570		63		351		2,156
Total	$	700,158	$	695,878	$	20,588	$	87,722	$	587,568	$	833,003	$	820,735	$	15,470	$	96,862	$	708,403
Financial Liabilities:
Deposits		654,643		657,414		483,956		173,458		-		761,546		767,009		539,946		227,063		—
Borrowed funds		26,000		25,499		-		25,499		-		45,350		44,869		—		44,869		—
Accrued interest payable		413		413		23		390		-		495		495		30		465		—
Total	$	681,056	$	683,326	$	483,979	$	199,347	$	-	$	807,391	$	812,373	$	539,976	$	272,397	$	—

This information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation's disclosures and those of other companies may not be meaningful.

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9.8.	Regulatory Matters

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

In ~~2015,~~2018 the Board of Governors of the Federal Reserve System amended its Small Bank Holding Company Policy Statement by increasing the policy’s consolidated assets threshold from ~~$500 million~~$1 billion to $1$3 billion. The primary benefit of being deemed a "small bank holding company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in byon January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer ~~is being~~was phased in from 0.0% for 2015 to 2.50% byin 2019. The capital conservation buffer for 2019 is 2.50% and for 2018 iswas 1.875% ~~and was 1.25% for 2017 and 0.625% for 2016. The net unrealized gain or loss on available for sale securities is~~. Amounts recorded to accumulated other comprehensive income are not included in computing regulatory capital. Management believes as of September 30, ~~2018,~~2019, the Bank ~~meets~~met all capital adequacy requirements to which ~~they are~~it was subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, ~~2018,~~2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

The following table sets forth certain information concerning the Bank’s regulatory capital as of the dates presented. The capital adequacy ratios disclosed below are exclusive of the capital conservation buffer.

(Dollar amounts in thousands)	September 30, 2018				December 31, 2017				September 30, 2019					December 31, 2018
	Amount		Ratio		Amount		Ratio		Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets:
Actual	$	66,711		13.22%	$	64,221		12.96%	$	79,681		13.78	%	$	76,344		12.93	%
For capital adequacy purposes		40,381		8.00%		39,630		8.00%		46,243		8.00	%		47,252		8.00	%
To be well capitalized		50,476		10.00%		49,537		10.00%		57,804		10.00	%		59,065		10.00	%
Tier 1 capital to risk-weighted assets:
Actual	$	60,401		11.97%	$	58,088		11.73%	$	73,172		12.66	%	$	69,836		11.82	%
For capital adequacy purposes		30,286		6.00%		29,722		6.00%		34,682		6.00	%		35,439		6.00	%
To be well capitalized		40,381		8.00%		39,630		8.00%		46,243		8.00	%		47,252		8.00	%
Common Equity Tier 1 capital to risk-weighted assets:
Actual	$	60,401		11.97%	$	58,088		11.73%	$	73,172		12.66	%	$	69,836		11.82	%
For capital adequacy purposes		22,714		4.50%		22,292		4.50%		26,012		4.50	%		26,579		4.50	%
To be well capitalized		32,809		6.50%		32,199		6.50%		37,573		6.50	%		38,393		6.50	%
Tier 1 capital to average assets:
Actual	$	60,401		7.90%	$	58,088		7.71%	$	73,172		8.13	%	$	69,836		7.95	%
For capital adequacy purposes		30,574		4.00%		30,117		4.00%		35,990		4.00	%		35,126		4.00	%
To be well capitalized		38,218		5.00%		37,647		5.00%		44,987		5.00	%		43,908		5.00	%

2422

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~~10.~~9.

Accumulated Other Comprehensive Income (Loss)

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the three months ended September 30, ~~2018~~2019 and ~~2017~~2018 and summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income:

(Dollar amounts in thousands)	Unrealized Gains		Defined				Unrealized Gains and Losses on Available-for-Sale Securities			Defined Benefit Pension Items			Totals
	and Losses on		Benefit
	Available-for-Sale		Pension
	Securities		Items		Totals
Accumulated Other Comprehensive Income (Loss) at July 1, 2018	$	(2,117)	$	(4,839)	$	(6,956)
Accumulated Other Comprehensive Income (Loss) at July 1, 2019							$	267		$	(4,840	)	$	(4,573	)
Other comprehensive income before reclassification		(447)		-		(447)		130			—			130
Amounts reclassified from accumulated other comprehensive income (loss)		3		-		3		(33	)		—			(33	)
Net current period other comprehensive income		(444)		-		(444)
Accumulated Other Comprehensive Income (Loss) at September 30, 2018	$	(2,561)	$	(4,839)	$	(7,400)
Net current period other comprehensive income (loss)								97			—			97
Accumulated Other Comprehensive Income (Loss) at September 30, 2019							$	364		$	(4,840	)	$	(4,476	)

(Dollar amounts in thousands)	Amount Reclassified
Details about Accumulated Other Comprehensive Loss Components	from Accumulated Other Comprehensive Income For the three months ended September 30, 2019			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(42	)	Net gain on sale of available-for-sale securities
Tax effect		9		Provision for income taxes
Total reclassifications for the period	$	(33	)	Net of tax

(Dollar amounts in thousands)	Unrealized Gains and Losses on Available-for-Sale Securities			Defined Benefit Pension Items			Totals
Accumulated Other Comprehensive Income (Loss) at July 1, 2018	$	(2,117	)	$	(4,839	)	$	(6,956	)
Other comprehensive income before reclassification		(446	)		—			(446	)
Amounts reclassified from accumulated other comprehensive income (loss)		2			—			2
Net current period other comprehensive income (loss)		(444	)		—			(444	)
Accumulated Other Comprehensive Income (Loss) at September 30, 2018	$	(2,561	)	$	(4,839	)	$	(7,400	)

~~(Dollar amounts in thousands)~~	~~Amount Reclassified~~
	~~from Accumulated~~
	~~Other Comprehensive~~
	~~Income~~		~~Affected Line Item in the~~
~~Details about Accumulated Other~~	~~For the three months~~		~~Statement Where Net~~
~~Comprehensive Income Components~~	~~ended September 30, 2018~~		~~Income is Presented~~
~~Unrealized gains and losses on available-for-sale securities~~	$	~~(4)~~	~~Net gain on sale of available-for-sale securities~~
~~Unrealized gains and losses on available-for-sale securities~~		-	~~Other than temporary impairment losses~~
		1	~~Provision for income taxes~~
~~Total reclassifications for the period~~	$	~~(3)~~	~~Net of tax~~

(Dollar amounts in thousands)

Unrealized Gains

Defined

and Losses on

Benefit

Available-for-Sale

Pension

Securities

Items

Totals
Accumulated Other Comprehensive Income (Loss) at July 1, 2017
$ (307) $ (3,812) $ (4,119)
Other comprehensive income before reclassification
153 - 153
Amounts reclassified from accumulated other comprehensive income (loss)
- - -
Net current period other comprehensive income
153 - 153
Accumulated Other Comprehensive Income (Loss) at September 30, 2017
$ (154) $ (3,812) $ (3,966)

(Dollar amounts in thousands)	Amount Reclassified
Details about Accumulated Other Comprehensive Loss Components	from Accumulated Other Comprehensive Income For the three months ended September 30, 2018		Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	2	Net loss on sale of available-for-sale securities
Tax effect		—	Provision for income taxes
Total reclassifications for the period	$	2	Net of tax

2523

Table of Contents

~~10.~~9.

Accumulated Other Comprehensive Income (Loss)(continued)

~~(Dollar amounts in thousands)~~	~~Amount Reclassified~~
	~~from Accumulated~~
	~~Other Comprehensive~~
	~~Income~~		~~Affected Line Item in the~~
~~Details about Accumulated Other~~	~~For the three months~~		~~Statement Where Net~~
~~Comprehensive Loss Components~~	~~ended September 30, 2017~~		~~Income is Presented~~
~~Unrealized gains and losses on available-for-sale securities~~	$	-	~~Net gain on sale of available-for-sale securities~~
	$	-	~~Other than temporary impairment losses~~
		-	~~Provision for income taxes~~
~~Total reclassifications for the period~~	$	-	~~Net of tax~~

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss), net of tax, for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 and ~~summarized~~summarizes the significant amounts reclassified out of each component of accumulated other comprehensive income:

(Dollar amounts in thousands)	Unrealized Gains		Defined				Unrealized Gains and Losses on Available-for-Sale Securities			Defined Benefit Pension Items			Totals
	and Losses on		Benefit
	Available-for-Sale		Pension
	Securities		Items		Totals
Accumulated Other Comprehensive Income (Loss) at January 1, 2018	$	(679)	$	(4,839)	$	(5,518)
Accumulated Other Comprehensive Income (Loss) at January 1, 2019							$	(1,517	)	$	(4,840	)	$	(6,357	)
Other comprehensive income before reclassification		(1,722)		-		(1,722)		1,915			—			1,915
Amounts reclassified from accumulated other comprehensive income (loss)		27		-		27		(34	)		—			(34	)
Net current period other comprehensive income		(1,695)		-		(1,695)		1,881			—			1,881
Cumulative effect of adoption of ASU 2016-01		(187)		-		(187)
Accumulated Other Comprehensive Income (Loss) at September 30, 2018	$	(2,561)	$	(4,839)	$	(7,400)
Accumulated Other Comprehensive Income (Loss) at September 30, 2019							$	364		$	(4,840	)	$	(4,476	)

~~(Dollar amounts in thousands)~~	~~Amount Reclassified~~
	~~from Accumulated~~
	~~Other Comprehensive~~
	~~Income~~		~~Affected Line Item in the~~
~~Details about Accumulated Other~~	~~For the nine months~~		~~Statement Where Net~~
~~Comprehensive Income Components~~	~~ended September 30, 2018~~		~~Income is Presented~~
~~Unrealized gains and losses on available-for-sale securities~~	$	~~(34)~~	~~Net gain on sale of available-for-sale securities~~
~~Unrealized gains and losses on available-for-sale securities~~		-	~~Other than temporary impairment losses~~
		7	~~Provision for income taxes~~
~~Total reclassifications for the period~~	$	~~(27)~~	~~Net of tax~~

(Dollar amount in thousands)	Amount Reclassified
Details about Accumulated Other Comprehensive Income Components	from Accumulated Other Comprehensive Income For the Nine Months Ended September 30, 2019			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(43	)	Net gain on sale of available-for-sale securities
Tax effect		9		Provision for income taxes
Total reclassifications for the period	$	(34	)	Net of tax

(Dollar amounts in thousands)	Unrealized Gains and Losses on Available-for-Sale Securities			Defined Benefit Pension Items			Totals
Accumulated Other Comprehensive Income (Loss) at January 1, 2018	$	(679	)	$	(4,839	)	$	(5,518	)
Cumulative effect of change in accounting principle for marketable equity securities, net of tax		(187	)		—			(187	)
Accumulated Other Comprehensive Income (Loss) at January 1, 2018, as adjusted	$	(866	)	$	(4,839	)	$	(5,705	)

Other comprehensive income before reclassification		(1,702	)		—			(1,702	)
Amounts reclassified from accumulated other comprehensive income (loss)		7			—			7
Net current period other comprehensive income		(1,695	)		—			(1,695	)

Accumulated Other Comprehensive Income (Loss) at September 30, 2018	$	(2,561	)	$	(4,839	)	$	(7,400	)

(Dollar amount in thousands)	Amount Reclassified
Details about Accumulated Other Comprehensive Income Components	from Accumulated Other Comprehensive Income For the Nine Months Ended September 30, 2018			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	9		Net loss on sale of available-for-sale securities
Tax effect		(2	)	Provision for income taxes
Total reclassifications for the period	$	7		Net of tax

Table of Contents

(Dollar amounts in thousands)

Unrealized Gains

Defined

and Losses on

Benefit

Available-for-Sale

Pension

Securities

Items

Totals
Accumulated Other Comprehensive Income (Loss) at January 1, 2017
$ (679) $ (3,812) $ (4,491)
Other comprehensive income before reclassification
421 - 421
Amounts reclassified from accumulated other comprehensive income (loss)
104 - 104
Net current period other comprehensive income
525 - 525
Accumulated Other Comprehensive Income (Loss) at September 30, 2017
$ (154) $ (3,812) $ (3,966)

(Dollar amounts in thousands)

Amount Reclassified

from Accumulated

Other Comprehensive

Income

Affected Line Item in the
Details about Accumulated Other

For the nine months

Statement Where Net
Comprehensive Income Components

ended September 30, 2017

Income is Presented
Unrealized gains and losses on available-for-sale securities
$ 350
Net gain on sale of available-for-sale securities
Unrealized gains and losses on available-for-sale securities
(508)
Other than temporary impairment losses
54
Provision for income taxes
Total reclassifications for the period
$ (104)
Net of tax

~~11.~~10.

Revenue Recognition

On January 1, 2018, the Corporation adopted ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606) and all subsequent ASUs that modified Topic 606. Interest income, net securities gains (losses) and bank-owned life insurance are not included within the scope of Topic 606. For the revenue streams in the scope of Topic 606, service charges on deposits and electronic banking fees, there are no significant judgments related to the amount and timing of revenue recognition. All of the Corporation's revenue from contracts with customers is recognized within noninterest income.

Service charges on deposits: The Corporation earns fees from its deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such stop payment charges, statement rendering and other fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Electronic banking fees: The Corporation earns interchange and other ATM related fees from cardholder transactions conducted through the various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The gross amount of these fees are processed through noninterest income. Other fees, such a transaction surcharges and card replacement fees are withdrawn from the customer's account balance at the time of service.

~~Table of Contents~~

The following table presents the Corporation's sources of noninterest income for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018.

(Dollar amounts in thousands)	Three months ended				Nine months ended				For the three months ended September 30,				For the nine months ended September 30,
	September 30,				September 30,				2019		2018		2019		2018
	2018		2017		2018		2017
Non Interest Income
Noninterest income
In-scope of Topic 606:
Service charges on deposits
Maintenance fees	$	38	$	40	$	114	$	118	$	51	$	38	$	134	$	114
Overdraft fees		417		341		1,100		965		403		417		1,253		1,100
Other fees		73		66		214		207		76		73		235		214
Electronic banking fees		327		292		971		855		384		327		1,079		971
Noninterest income (in-scope of Topic 606)		855		739		2,399		2,145		914		855		2,701		2,399
Noninterest income (out-of-scope of Topic 606)		207		1,535		610		1,851
Noninterest income (out-of-scope of Topic 606)(1)										295		207		695		610
Total noninterest income	$	1,062	$	2,274	$	3,009	$	3,996	$	1,209	$	1,062	$	3,396	$	3,009

⁽¹⁾

Noninterest income items that are out-of-scope include net realized gains (losses) on sales of securities, net gains (losses) on sales of loans, earnings on bank-owned life insurance and certain other noninterest income items.

Table of Contents

11.

Leases

Effective January 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842). As of September 30, 2019, the Corporation leases real estate for five branch offices under various operating lease agreements. The lease agreements have maturity dates ranging from August 2025 to December 2056, including all extension periods. The Corporation has assumed that there are currently no circumstances in which the leases would be terminated before exhausting all options for extensions. The weighted average remaining life of the lease term for these leases was 13.14 years as of September 30, 2019.

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption. This methodology will be continued for the commencement of any subsequent lease agreements. The weighted average discount rate for the leases was 3.48% as of September 30, 2019.

The total operating lease costs were $48,000 and $145,000, respectively, for the three and nine months ended September 30, 2019. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $1.5 million and $1.7 million, respectively, as of September 30, 2019. Rental expense for operating leases classified under ASC 840 for the three and nine months ended September 30, 2018 was $50,000 and $150,000, respectively.

Total estimated rental commitments for the operating leases were as follows as of September 30, 2019:

(Dollar amounts in thousands)
Year ending December 31:
2019 (excluding nine months)	$	53
2020		212
2021		217
2022		222
2023		222
Thereafter		1,289
Total minimum lease payments		2,215
Discount effect of cash flows		(470	)
Present value of lease liabilities	$	1,745

Table of Contents

12.	Recent Accounting Pronouncements (continued)

Newly Issued Not Yet Effective Accounting Standards

In February 2016, the FASB issued ASU 2016-02 "Leases". This ASU requires lessees to record most leases on their balance sheet but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods therein. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Corporation has analyzed data on leased assets and purchased software to manage lease accounting. The adoption of this guidance is expected to increase both assets and liabilities, but is not expected to have a material impact on the consolidated statement of income.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of the financial instruments. The main provisions of the guidance include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for available-for-sale debt securities rather than reduce the carrying amount of the investments, as is required by the other-than-temporary impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. Management has selected a software vendor and is currently inworking through the ~~developmental stages of collecting~~implementation process. The Corporation is reviewing available historical information in order to assess the expected credit losses and determine the impact of the adoption of ASU 2016-13 on the Corporation's financial statements.

~~Table~~ On October 16, 2019, FASB announced a delay for effective date of ~~Contents~~

this ASU for smaller reporting companies until fiscal years beginning after December 15, 2022. The guidance is required to be applied using the modified retrospective approach. As the Corporation is a smaller reporting company, the delay would be applicable.

~~12.~~

~~Recent Accounting Pronouncements (continued)~~

In January 2017, FASB ASU 2017-04, "Simplifying the Test for Goodwill Impairment". This ASU simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under this amendment, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Corporation has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Corporation's most recent annual impairment assessment determined that the Corporation's goodwill was not impaired. Although the Corporation cannot anticipate future goodwill impairment assessments, based on the most recent assessment it is unlikely that an impairment amount would need to be calculated and, therefore, does not anticipate a material impact from these amendments to the Corporation's financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis.

Adoption of New Accounting Policies

In February 2016, the FASB issued ASU 2016-02 "Leases". This ASU requires lessees to record most leases on their balance sheet but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. ASU 2016-02 was effective for annual periods beginning after December 15, 2018, and interim periods therein. In January 2018, the FASB issued ASU 2018-01, which allows entities the option to apply the provisions of the new lease guidance at the effective date without adjusting the comparative periods presented. Adoption of this guidance as of January 1, 2019 resulted in the recording of operating lease right-of-use assets of $1.6 million and operating lease liabilities of $1.8 million. The Corporation recorded a cumulative adjustment to retained earning for prior periods of $170,000, net of deferred taxes of $45,000. See Note 11-Leases for more information.

In March 2017, the FASB issued ASU 2017-08, “Receivable - Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 amends guidance on the amortization period of premiums on certain purchased callable debt securities to shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. The amendments are effective for public business entities for fiscal years beginning after December 15, ~~2019,~~2018, and interim periods ~~within fiscal years beginning after December 15, 2020. Early~~therein. The adoption of this guidance on January 1, 2019 resulted in a cumulative adjustment to retained earnings of $10,000, net of deferred taxes of $3,000, for the prior periods. The remaining securities subject to this guidance have a call date one month prior to maturity, therefore the impact to the statement of income in subsequent periods is ~~permitted, including adoption in an interim period. The Corporation is currently evaluating the potential impact of ASU 2017-08 on its financial statements and disclosures.~~immaterial.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The amendments in this Update are to better reflect the economic results of hedging in the financial statements along with simplification of certain hedge accounting requirements. Specifically, the entire change in the fair value of the hedging instrument is required to be presented in the same income statement line as and in the same period that the earnings effect of the hedged item is recognized. Therefore, hedge ineffectiveness will not be reported separately or in a different period. In addition, hedge effectiveness can be determined qualitatively in periods following inception. The amendments permit an entity to measure the change in fair value of the hedged item on the basis of the benchmark rate component. They also permit an entity to measure the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged. For a closed portfolio of prepayable financial assets, an entity is permitted to designate the amount that is not expected to be affected by prepayments or defaults as the hedged item. For public business entities, the new guidance iswas effective for fiscal years beginning after December 15, 2018, and interim periods therein. ~~Early adoption is permitted.~~ The Corporation is currently ~~evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.~~

In August 2018, the FASB issued ASU 2018-13 "Fair Value Measurement". ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Disclosures for transfers between Level 1 and Level 2, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurement will be removed. Additional disclosures will be required relating to (a) changes in unrealized gains/losses in OCI for Level 3 fair value measurements for assets held at the end of the reporting period, and (b) the process of calculating weighted average for significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. Early adoption is permitted. The Corporation is currently evaluating the potential impact of ASU 2018-13 on its financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-14 "Compensation - Retirement Benefits - Defined Benefit Plans". ASU 2018-14 removes disclosures pertaining to (a) the amounts of AOCI expected to be recognized as pension costs over the next fiscal year, (b) the amount and timing of plan assets expected to be returned to the employer, and (c) the effect of one-percentage-point change in the assumed health care trends on (i) service and interest costs and (ii) post-retirement health care benefit obligation. A disclosure will be added requiring an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments in this update are effective retrospectively for annual periods and interim periods within those annual periods beginning after December 15, 2020. Early adoption is permitted. The Corporation is currently evaluating the potential impact of ASU 2018-14 on its financial statements and disclosures.

~~Adoption of New Accounting Policies~~

In March 2017, the FASB issued ASU 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendments in this update require that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this update improve the consistency, transparency, and usefulness of financial information to users that have communicated that the service cost component generally is analyzed differently from the other components of net benefit cost. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The adoption of the new guidance diddoes not have ~~a material~~derivative or hedging instruments so this guidance had no impact on ~~the~~ consolidated financial statements.

~~Table of Contents~~

~~12.~~

~~Recent Accounting Pronouncements (continued)~~

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-9 “Revenue from Contracts with Customers”. ASU 2014-9 provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance does not apply to revenue associated with financial instruments, including loans and securities. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. The Corporation has evaluated revenue streams within noninterest income to assess the applicability of this guidance and determined that service charges on deposits and electronic banking fees within the scope of this ASU. Because performance obligations are satisfied as services are rendered and the fees are fixed, there is little judgment involved in applying the guidance that significantly affects the determination of the amount and timing of revenue from contracts with customers. The adoption of this guidance on January 1, 2018 did not have a material impact on the Corporation's financial statements. See Note 11 for further detail related to the adoption of this standard.

In January 2016, the FASB issued ASU 2016-1 “Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-1 revises the accounting for the classification and measurement of investments in equity securities and revises the presentation of certain fair value changes for financial liabilities measured at fair value. For equity securities, the guidance in ASU 2016-1 requires equity investments to be measured at fair value with changes in fair value recognized in net income. For financial liabilities that are measured at fair value in accordance with the fair value option, the guidance requires presenting in other comprehensive income the change in fair value that relates to a change in instrument-specific credit risk. ASU 2016-1 also eliminates the disclosure assumptions used to estimate fair value for financial instruments measured at amortized cost and requires disclosure of an exit price notion in determining the fair value of financial instruments measured at amortized cost. ASU 2016-1 was effective for interim and annual periods beginning after December 15, 2017. The adoption of ASU 2016-1 did not have a significant impact on the Corporation's financial statements.

~~In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)”~~. ASU 2016-15 clarifies the presentation of specific types of cash flow receipts and payments, including the payment of debt prepayment or debt extinguishment costs, contingent consideration cash payments paid subsequent to the acquisition date and proceeds from settlement of BOLI policies. This guidance was effective for fiscal years beginning after December 15, 2017. The adoption of ASU 2016-15 did not have an impact the Corporation's financial statements and disclosures.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section discusses the consolidated financial condition and results of operations of Emclaire Financial Corp and its wholly owned subsidiaries for the three and nine months ended September 30, ~~2018,~~2019, compared to the same periods in ~~2017~~2018 and should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the SEC and with the accompanying consolidated financial statements and notes presented in this Form 10-Q.

This Form 10-Q, including the financial statements and related notes, contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” or words or phrases of similar meaning. We caution that the forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performances or achievements could differ materially from those contemplated, expressed or implied by the forward looking statements. Therefore, we caution you not to place undue reliance on our forward looking information and statements. Except as required by applicable law or regulation, we will not update the forward looking statements to reflect actual results or changes in factors affecting the forward looking statements.

CHANGES IN FINANCIAL CONDITION

Total assets increased ~~$22.7~~$42.6 million, or 4.7%, to ~~$772.8~~$941.4 million at September 30, ~~2018~~2019 from ~~$750.1~~$898.9 million at December 31, ~~2017. Asset growth~~2018. The change in assets was driven primarily by ~~increases~~an increase in cash and cash equivalents, securities and interest earning time deposits of $38.3 million, $20.2 million and $3.5 million, respectively, partially offset by a decrease in net loans ~~receivable~~ of ~~$8.3 million and $14.9 million, respectively.~~$20.3 million. Total liabilities increased ~~$22.2~~$36.6 million, or 4.5%, to ~~$713.2~~$855.5 million at September 30, ~~2018~~2019 from ~~$691.0~~$818.9 million at December 31, ~~2017, resulting~~2018 primarily ~~from a $27.7 million, or 4.2%,~~due to an increase in customer deposits of $46.5 million, partially offset by a ~~$6.2 million~~ decrease in borrowed ~~funds. Deposit growth consisted~~funds of ~~a $20.7 million, or 3.9%, increase in interest bearing deposits and a $7.0 million, or 5.6%, increase in non-interest bearing deposits.~~$11.6 million.

Stockholders’ equity increased ~~$519,000~~$5.9 million, or 7.4%, to ~~$59.6~~$85.9 million at September 30, ~~2018~~2019 from ~~$59.1~~$80.0 million at December 31, ~~2017~~2018 primarily due to a ~~$2.2~~$3.8 million increase in retained earnings as a result of ~~$3.9~~$6.3 million of net income, partially offset by ~~$1.9~~$2.4 million of ~~common~~ dividends ~~paid, and a $1.9 million decrease in~~paid. Additionally, the accumulated other comprehensive ~~income.~~loss declined by $1.9 million as a result of improvement in the Corporation unrealized gains on securities. The Corporation remains well capitalized and is positioned for continued growth with total stockholders’ equity at ~~7.7%~~9.1% of total assets. ~~Tangible book~~Book value per common share was ~~$21.59~~$30.28 at September 30, ~~2018,~~2019, compared to ~~$21.28~~$28.09 at December 31, ~~2017.~~

2018.

At September 30, ~~2018,~~2019, the Bank was considered “well-capitalized” with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of ~~7.90%~~8.13%, ~~11.97%~~12.66%, ~~11.97%~~12.66% and ~~13.22%~~13.78%, respectively. The Bank was also considered “well-capitalized” at December 31, ~~2017~~2018 with a Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of ~~7.71%~~7.95%, ~~11.73%~~11.82%, ~~11.73%~~11.82% and ~~12.96%~~12.93%, respectively.

RESULTS OF OPERATIONS

Comparison of Results for the Three Months Ended September 30, ~~2018~~2019 and ~~2017~~2018

General. Net income ~~decreased $546,000,~~available to common stockholders increased $1.0 million, or ~~32.0%~~86.7%, to ~~$1.2~~$2.2 million ~~or $0.51 per common share,~~ for the three months ended September 30, ~~2018~~2019 from ~~$1.7~~$1.2 million ~~or $0.77 per common share,~~ for the same period in ~~2017.~~2018. This ~~decrease~~increase was the result of ~~a $1.2 million decrease~~increases in net interest income and noninterest income of $875,000 and ~~increases~~$147,000, respectively, and a decrease of $445,000 in ~~noninterest expense and~~ the provision for loan losses, ~~of $113,000 and $30,000, respectively,~~ partially offset by ~~a $604,000 increase in net interest income and a decrease of $205,000~~increases in the provision for income ~~taxes.~~taxes and noninterest expense of $257,000 and $203,000, respectively.

Net interest income. Tax equivalent net interest income increased ~~$519,000,~~$872,000, or ~~9.2%~~14.1%, to $7.1 million for the three months ended September 30, 2019 from $6.2 million for the three months ended September 30, 2018 ~~from $5.7 million for the three months ended September 30, 2017.~~. This increase was attributed to an increase in tax equivalent interest income of ~~$697,000,~~$1.7 million, partially offset by an increase in interest expense of ~~$179,000.~~

$846,000.

Interest income. Tax equivalent interest income increased ~~$697,000,~~$1.7 million, or ~~10.2%~~22.9%, to ~~$7.5~~$9.2 million for the three months ended September 30, ~~2018~~2019 from ~~$6.8~~$7.5 million for the same period in ~~2017.~~2018. This increase was attributed to increases in interest earned on loans, ~~securities and~~ interest-earning deposits with banks and securities and dividends on federal bank stocks of ~~$664,000, $18,000~~$1.5 million, $139,000, $52,000 and ~~$14,000,~~$39,000, respectively.

Tax equivalent interest earned on loans receivable increased ~~$664,000,~~$1.5 million, or ~~11.0%~~22.2%, to ~~$6.7~~$8.2 million for the three months ended September 30, ~~2018~~2019 compared to ~~$6.1~~$6.7 million for the same period in ~~2017.~~2018. This increase resulted from a ~~$37.5~~$100.9 million, or ~~6.7%~~17.0%, increase in average loans, accounting for ana $1.2 million increase ~~of $418,000~~ in interest income. The increase in loans receivable was related to the acquisition of ~~Northern Hancock Bank and Trust Co. (Northern Hancock)~~Community First Bancorp, Inc. in ~~September 2017 and strong loan growth achieved in late 2017 and the first nine months of~~October 2018. Adding to this favorable volume variance, the average yield on loans increased 1720 basis points to ~~4.48%~~4.68% for the three months ended September 30, ~~2018,~~2019, versus ~~4.31%~~4.48% for the same period in ~~2017.~~2018. This favorable yield variance accounted for a ~~$246,000~~$307,000 increase in interest income. Accretion of purchase accounting adjustments on acquired loans accounted for approximately 5 basis points of the yield increase.

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Interest earned on deposits with banks increased $139,000 to $251,000 for the three months ended September 30, 2019 compared to $112,000 for the same period in 2018. This increase resulted from a $25.2 million, or 98.2%, increase in average cash balances, accounting for a $123,000 increase in interest income. Adding to this favorable volume variance, the average yield on cash and cash equivalent balances increased 23 basis points to 1.96% for the three months ended September 30, 2019, versus 1.73% for the same period in 2018, accounting for a $16,000 increase in interest income.

Tax equivalent interest earned on securities increased ~~$18,000,~~$52,000, or ~~3.0%~~8.4%, to ~~$622,000~~$674,000 for the three months ended September 30, ~~2018~~2019 compared to ~~$604,000~~$622,000 for the same period in 2018. The average balance of securities increased $4.3 million, or 4.3%, accounting for a $27,000 increase in interest income. Additionally, the average yield on securities increased by 10 basis points to 2.58% for the three months ended September 30, ~~2017. This increase resulted from a 12 basis point increase in the average yield on securities to~~2019 versus 2.48% ~~for the three months ended September 30, 2018 versus 2.36%~~ for the same period in ~~2017.~~2018. This favorable yield variance accounted for a ~~$30,000~~$25,000 increase in interest income. ~~Partially offsetting this favorable variance, the average balance of securities decreased $2.0 million, accounting for a $12,000 decrease in interest income.~~

~~Interest earned~~Dividends on ~~deposits with banks~~federal bank stocks increased ~~$14,000,~~$39,000, or ~~14.3%~~60.0%, to ~~$112,000~~$104,000 for the three months ended September 30, ~~2018 compared to $98,000~~2019 from $65,000 for the same period in 2018. This increase was primarily due to a $1.4 million, or 30.5%, increase in the average balance of federal bank stocks, accounting for a $22,000 increase in interest income. Additionally, an increase of 131 basis points in the average yield on federal bank stocks to 7.10% for the three months ended September 30, ~~2017. This increase resulted from a 57 basis point~~2019, versus 5.79% for the same period in 2018, accounted for an $17,000 increase in ~~the average yield on these accounts~~interest income.

Interest expense. Interest expense increased $846,000, or 63.8%, to ~~1.73%~~$2.2 million for the three months ended September 30, 2018, versus 1.16% for the same period in 2017, accounting for a $41,000 increase in interest income. Partially offsetting this favorable variance, the average balance of interest-earning deposits decreased $7.8 million, or 23.4%, accounting for a decrease of $27,000 in interest income.

~~Interest expense.~~ ~~Interest expense increased $179,000, or 15.6%, to~~2019 from $1.3 ~~million for the three months ended September 30, 2018 from $1.1~~ million for the same period in ~~2017.~~2018. This increase in interest expense can be attributed to ~~a $359,000 increase~~increases in interest incurred on deposits ~~partially offset by a decrease~~and borrowed funds of ~~$180,000 in interest incurred on borrowed funds.~~$755,000 and $91,000, respectively.

Interest expense incurred on deposits increased ~~$359,000,~~$755,000, or ~~43.6%~~63.8%, to $1.9 million for the three months ended September 30, 2019 compared to $1.2 million for the ~~three months ended September 30, 2018 compared to $824,000 for the~~ same period in ~~2017.~~2018. The average cost of interest-bearing deposits increased 2235 basis points to ~~0.86%~~1.21% for the three months ended September 30, ~~2018,~~2019, versus ~~0.64%~~0.86% for the same period in ~~2017,~~2018, accounting for a ~~$288,000~~$550,000 increase in interest expense. Additionally, the average balance of interest-bearing deposits increased ~~$40.8~~$85.4 million, or ~~8.0%~~15.6%, to ~~$548.5~~$633.9 million for the three months ended September 30, ~~2018,~~2019, compared to ~~$507.6~~$548.5 million for the same period in ~~2017~~2018 causing a ~~$71,000~~$205,000 increase in interest expense. This increase was primarily due to the acquisition of ~~Northern Hancock~~Community First in ~~September 2017 and strong deposit growth during late 2017 and the first nine months of~~October 2018.

Interest expense incurred on borrowed funds ~~decreased $180,000,~~increased $91,000, or ~~55.9%~~64.1%, to ~~$142,000~~$233,000 for the three months ended September 30, ~~2018,~~2019, compared to ~~$322,000~~$142,000 for the same period in the prior year. The average balance of borrowed funds ~~decreased $21.5~~increased $14.0 million, or ~~52.0%~~70.7%, to ~~$19.8~~$33.8 million for the three months ended September 30, ~~2018,~~2019, compared to ~~$41.3~~$19.8 million for the same period in ~~2017~~2018 causing ~~a $143,000 decrease~~an $90,000 increase in interest expense. The ~~reduction~~increase in the outstanding balance of borrowed funds primarily resulted from ~~the payoff of maturing FHLB long-term notes of $15.0 million in November 2017 and the early payoff of a~~three additional $5.0 million FHLB long-term ~~note~~notes taken in ~~February~~December 2018. ~~In addition, the~~The average cost of long-term borrowed funds ~~decreased 28~~increased 12 basis points to ~~2.82%~~2.54% for the three months ended September 30, ~~2018~~2019 compared to ~~3.10%~~2.42% for the same period in ~~2017~~2018 causing a ~~$38,000~~$5,000 increase in interest expense. Partially offsetting the cost of long-term borrowings, the average cost of short-term borrowed funds decreased 60 basis points to 5.71% for the three months ended September 30, 2019 compared to 6.31% for the same period in 2018 causing a $4,000 decrease in interest expense.

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Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average loan balances include nonaccrual loans and exclude the allowance for loan losses and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis. The information is based on average daily balances during the periods presented.

(Dollar amounts in thousands)

Three months ended September 30,

2018

2017

Average

Yield /

Average

Yield /

Balance

Interest

Rate

Balance

Interest

Rate
Interest-earning assets:

Loans, taxable
$ 574,904 $ 6,536 4.51% $ 532,225 $ 5,763 4.30%
Loans, tax exempt
19,294 180 3.70% 24,495 289 4.69%
Total loans receivable
594,198 6,716 4.48% 556,720 6,052 4.31%
Securities, taxable
75,759 464 2.43% 75,367 421 2.22%
Securities, tax exempt
23,733 158 2.65% 26,100 183 2.78%
Total securities
99,492 622 2.48% 101,467 604 2.36%
Interest-earning deposits with banks
25,670 112 1.73% 33,512 98 1.16%
Federal bank stocks
4,453 65 5.79% 4,882 64 5.20%
Total interest-earning cash equivalents
30,123 177 2.33% 38,394 162 1.67%
Total interest-earning assets
723,813 7,515 4.12% 696,581 6,818 3.88%
Cash and due from banks
2,940 2,720
Other noninterest-earning assets
46,375 45,308
Total Assets
$ 773,128 $ 744,609
Interest-bearing liabilities:

Interest-bearing demand deposits
$ 379,544 $ 502 0.52% $ 340,771 $ 314 0.37%
Time deposits
168,933 681 1.60% 166,872 510 1.21%
Total interest-bearing deposits
548,477 1,183 0.86% 507,643 824 0.64%
Borrowed funds, short-term
2,050 33 6.31% 2,500 28 4.50%
Borrowed funds, long-term
17,753 109 2.42% 38,766 294 3.01%
Total borrowed funds
19,803 142 2.84% 41,266 322 3.10%
Total interest-bearing liabilities
568,280 1,325 0.93% 548,909 1,146 0.83%
Noninterest-bearing demand deposits
134,183 - - 128,254 - -
Funding and cost of funds
702,463 1,325 0.75% 677,163 1,146 0.67%
Other noninterest-bearing liabilities
10,733 10,061
Total Liabilities
713,196 687,224
Stockholders' Equity
59,932 57,385
Total Liabilities and Stockholders' Equity
$ 773,128 $ 744,609
Net interest income
$ 6,190 $ 5,672

Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)
3.19% 3.05%

Net interest margin (net interest income as a percentage of average interest-earning assets)
3.39% 3.23%

~~Table of Contents~~

~~Analysis of Changes in Net Interest Income.~~ The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation’s interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate), rate (change in rate multiplied by prior year volume) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.

(Dollar amounts in thousands)

Three months ended September 30,

2018 versus 2017

Increase (Decrease) due to

Volume

Rate

Total
Interest income:

Loans
$ 418 $ 246 $ 664
Securities
(12) 30 18
Interest-earning deposits with banks
(27) 41 14
Federal bank stocks
(6) 7 1
Total interest-earning assets
373 324 697

Interest expense:

Interest-bearing deposits
70 289 359
Borrowed funds, short-term
(6) 11 5
Borrowed funds, long-term
(136) (49) (185)
Total interest-bearing liabilities
(72) 251 179
Net interest income
$ 445 $ 73 $ 518

~~Provision for loan losses.~~ The Corporation records provisions for loan losses to maintain a level of total allowance for loan losses that management believes, to the best of its knowledge, covers all probable incurred losses estimable at each reporting date. Management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio.

~~Table of Contents~~

~~Information pertaining to the allowance for loan losses and nonperforming assets for the three months ended September 30, 2018 and 2017 is as follows:~~

(Dollar amounts in thousands)

As of or for the three months ended

September 30,

2018

2017
Balance at the beginning of the period
$ 6,118 $ 5,767
Provision for loan losses
300 270
Charge-offs
(76) (101)
Recoveries
18 4
Balance at the end of the period
$ 6,360 $ 5,940

Nonperforming loans
$ 5,488 $ 3,731
Nonperforming assets
6,088 4,160
Nonperforming loans to total loans
0.92% 0.64%
Nonperforming assets to total assets
0.79% 0.54%
Allowance for loan losses to total loans
1.06% 1.02%
Allowance for loan losses to non-performing loans
115.89% 159.21%

Nonperforming loans increased $3.0 million to $5.5 million at September 30, 2018 from $2.5 million at June 30, 2018. This increase was primarily due to a $2.5 million commercial mortgage loan being placed on nonaccrual status based on the deteriorating financial condition of the borrower. Given the estimated value of the borrower's significant real estate holdings, most of which are pledged as collateral for the loan, the Corporation does not currently expect to incur any loss on this loan and the loan continues to pay per its contractual terms. Of the $5.5 million in nonperforming loans, $3.1 million were not 30 days or more past due at September 30, 2018.

As of September 30, 2018, the Corporation’s classified and criticized assets amounted to $14.5 million, or 1.9% of total assets, with $10.6 million classified as substandard and $3.9 million identified as special mention. This compares to classified and criticized assets of $14.3 million, or 1.9% of total assets, with $10.3 million classified as substandard and $4.1 million identified as special mention at June 30, 2018.

The provision for loan losses increased $30,000, or 11.1%, to $300,000 for the three months ended September 30, 2018 from $270,000 for the same period in 2017 due primarily to general growth in the loan portfolio experienced in the third quarter of 2018.

~~Noninterest income.~~ Noninterest income decreased $1.2 million, or 53.3%, to $1.1 million for the three months ended September 30, 2018, compared to $2.3 million for the same period in 2017. During the quarter ended September 30, 2017, the Corporation recorded a $1.3 million bargain purchase gain related to the acquisition of NHBT. Partially offsetting this, fees and service charges increased $80,000 as overdraft charges for the three months ended September 30, 2018 outpaced the same period in the prior year and other income increased $28,000 due to increased interchange fee income.

~~Noninterest expense.~~ Noninterest expense increased $113,000, or 2.1%, to $5.6 million for the three months ended September 30, 2018 compared to $5.4 million for the same period in 2017. This increase in noninterest expense can be attributed primarily to increases in compensation and benefits expense and professional fees of $231,000 and $86,000 respectively, partially offset by a $286,000 decrease in acquisition costs.

Compensation and employee benefits increased $231,000, or 10.1%, to $2.5 million for the three months ended September 30, 2018 compared to $2.3 million for the same period in 2017. This increase was primarily the result of increases in salaries, other compensation and benefits and insurance benefits of $179,000, $39,000 and $33,000, respectively. These increases are primarily related to costs associated with the operation of the new full-service banking office in Chester, West Virginia which was acquired from Northern Hancock, increased health insurance costs and normal salary and benefit increases.

Professional fees increased $86,000, or 54.8%, to $243,000 for the three months ended September 30, 2018 compared to $157,000 for the same period in 2017. This increase was primarily the result of the addition of new consulting agreements added during the period as compared to 2017.

Acquisition costs decreased $286,000 for the three months ended September 30, 2018 compared to the same period in 2017. Costs related to the acquisition of Community First totaled $677,000 for the three months ended September 30, 2018, while costs related to the acquisition of Northern Hancock totaled $963,000 for the three months ended September 30, 2017.

~~Table of Contents~~

~~Provision for income taxes~~. The provision for income taxes decreased $205,000, or 52.3%, to $187,000 for the three months ended September 30, 2018 compared to $392,000 for the same period in the prior year. This related to a decrease in net income before taxes and a decrease in the Corporation’s effective tax rate to 13.9% for the three months ended September 30, 2018 compared to 18.7% for the same period in 2017. The decrease in the Corporation's effective tax rate was due to the enactment of the Tax Cuts and Job Act in December 2017 and the reduction of the corporate income tax rate from a maximum of 35% to a flat 21%.

~~Comparison of Results for the Nine Months Ended September 30, 2018 and 2017~~

~~General.~~ Net income increased $231,000, or 6.3%, to $3.9 million, or $1.72 per diluted share, for the nine months ended September 30, 2018 from $3.7 million, or $1.69 per diluted share, for the same period in 2017. This increase was the result of a $2.1 million increase in net interest income and a $243,000 decrease in the provision for income taxes, partially offset by increases in the provision for loan losses and noninterest expense of $347,000 and $796,000, respectively, and a $987,000 decrease in noninterest income.

~~Net interest income.~~ Tax equivalent net interest income increased $1.9 million, or 11.4%, to $18.3 million for the nine months ended September 30, 2018 from $16.5 million for the nine months ended September 30, 2017. This increase was attributed to an increase in tax equivalent interest income of $2.4 million, partially offset by an increase in interest expense of $487,000.

~~Interest income.~~ Tax equivalent interest income increased $2.4 million, or 12.0%, to $22.0 million for the nine months ended September 30, 2018 from $19.7 million for the same period in 2017. This increase was attributed to increases in interest earned on loans and interest-earning deposits with banks, dividends on federal bank stocks and interest earned on securities of $2.2 million, $77,000, $42,000 and $27,000, respectively.

Tax equivalent interest earned on loans receivable increased $2.2 million, or 12.6%, to $19.8 million for the nine months ended September 30, 2018 compared to $17.6 million for the same period in 2017. This increase resulted from a $44.3 million, or 8.1%, increase in average loans, accounting for a $1.5 million increase in interest income. The increase in loans receivable was related to the acquisition of Northern Hancock in September 2017 and strong loan growth achieved in late 2017 and the first nine months of 2018. Adding to this favorable volume variance, the average yield on loans increased 18 basis points to 4.48% for the nine months ended September 30, 2018, versus 4.30% for the same period in 2017. This favorable yield variance accounted for a $745,000 increase in interest income. Included in interest earned on loans receivable for the nine months ended September 30, 2018, the Corporation recorded $113,000 of recovered interest related to the payoff of a nonperforming loan relationship totaling $789,000.

Tax equivalent interest earned on securities increased $27,000, or 1.5%, to $1.8 million for the nine months ended September 30, 2018 and September 30, 2017. This increase resulted from a 6 basis point increase in the average yield on securities to 2.44% for the nine months ended September 30, 2018 versus 2.38% for the same period in 2017. This favorable yield variance accounted for a $48,000 increase in interest income. Partially offsetting this favorable variance, the average balance of securities decreased $1.2 million, accounting for a $21,000 decrease in interest income.

Interest earned on deposits with banks increased $77,000, or 51.0%, to $228,000 for the nine months ended September 30, 2018 compared to $151,000 for the nine months ended September 30, 2017. This increase resulted from a 47 basis point increase in the average yield on these accounts to 1.47% for the nine months ended September 30, 2018, versus 1.00% for the same period in 2017, accounting for a $73,000 increase in interest income. Additionally, the average balance of interest-earning deposits increased $485,000, accounting for a increase of $4,000 in interest income.

Dividends on federal bank stocks increased $42,000, or 23.5%, to $221,000 for the nine months ended September 30, 2018 from $179,000 for the same period in 2017. This increase was primarily due to an increase of 172 basis points in the average yield on federal bank stocks to 6.64% for the nine months ended September 30, 2018, versus 4.92% for the same period in 2017, accounting for a $58,000 increase in interest income. The increase in the average yield resulted from recent increases in the dividend rate paid on FHLB stock. Partially offsetting the favorable yield variance, the average balance of federal bank stocks decreased $408,000, or 8.4%, accounting for a $16,000 decrease in interest income.

~~Interest expense.~~ Interest expense increased $487,000, or 15.1%, to $3.7 million for the nine months ended September 30, 2018 from $3.2 million for the same period in 2017. This increase in interest expense can be attributed to a $1.0 million increase in interest incurred on deposits, partially offset by a decrease of $514,000 in interest incurred on borrowed funds.

Interest expense incurred on deposits increased $1.0 million, or 44.0%, to $3.3 million for the nine months ended September 30, 2018 compared to $2.3 million for the same period in 2017. The average cost of interest-bearing deposits increased 18 basis points to 0.81% for the nine months ended September 30, 2018, versus 0.63% for the same period in 2017, accounting for a $702,000 increase in interest expense. Additionally, the average balance of interest-bearing deposits increased $58.8 million, or 12.1%, to $543.7 million for the nine months ended September 30, 2018, compared to $484.9 million for the same period in 2017 causing a $299,000 increase in interest expense. This increase was primarily due to the acquisition of Northern Hancock in September 2017 and strong deposit growth during late 2017 and the first nine months of 2018.

~~Table of Contents~~

Interest expense incurred on borrowed funds decreased $514,000, or 53.9%, to $440,000 for the nine months ended September 30, 2018, compared to $954,000 for the same period in the prior year. The average balance of borrowed funds decreased $20.8 million, or 49.2%, to $21.5 million for the nine months ended September 30, 2018, compared to $42.2 million for the same period in 2017 causing a $422,000 decrease in interest expense. The reduction in the outstanding balance of borrowed funds resulted from the payoff of maturing FHLB long-term notes of $15.0 million in November 2017 and the early payoff of a $5.0 million FHLB long-term note in February 2018. In addition, the average cost of borrowed funds decreased 28 basis points to 2.74% for the nine months ended September 30, 2018 compared to 3.02% for the same period in 2017 causing a $92,000 decrease in interest expense.

~~Average Balance Sheet and Yield/Rate Analysis.~~ The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average loan balances include nonaccrual loans and exclude the allowance for loan losses and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis. The information is based on average daily balances during the periods presented.

(Dollar amounts in thousands)	Nine months ended September 30,												Three Months Ended September 30,
	2018						2017
	Average				Yield /		Average				Yield /		2019							2018
	Balance		Interest		Rate		Balance		Interest		Rate		Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
Interest-earning assets:
Loans, taxable	$	569,745	$	19,223		4.51%	$	522,156	$	16,747		4.29%	$	673,970	$	7,994		4.71	%	$	574,904	$	6,536		4.51	%
Loans, tax exempt		20,661		568		3.68%		23,914		833		4.66%		21,163		210		3.93	%		19,294		180		3.70	%
Total loans receivable		590,406		19,791		4.48%		546,070		17,580		4.30%		695,133		8,204		4.68	%		594,198		6,716		4.48	%
Securities, taxable		73,705		1,312		2.38%		74,128		1,208		2.18%		90,247		583		2.56	%		75,759		464		2.43	%
Securities, tax exempt		25,239		497		2.63%		26,008		574		2.95%		13,511		91		2.68	%		23,733		158		2.65	%
Total securities		98,944		1,809		2.44%		100,136		1,782		2.38%		103,758		674		2.58	%		99,492		622		2.48	%
Interest-earning deposits with banks		20,763		228		1.47%		20,278		151		1.00%		50,881		251		1.96	%		25,670		112		1.73	%
Federal bank stocks		4,461		221		6.64%		4,869		179		4.92%		5,813		104		7.10	%		4,453		65		5.79	%
Total interest-earning cash equivalents		25,224		449		2.38%		25,147		330		1.75%		56,694		355		2.48	%		30,123		177		2.33	%
Total interest-earning assets		714,574		22,049		4.13%		671,353		19,692		3.92%		855,585		9,233		4.28	%		723,813		7,515		4.12	%
Cash and due from banks		2,812						2,684						3,515							2,940
Other noninterest-earning assets		46,172						45,882						62,389							46,375
Total Assets	$	763,558					$	719,919					$	921,489						$	773,128

Interest-bearing liabilities:
Interest-bearing demand deposits	$	373,534	$	1,375		0.49%	$	321,177	$	685		0.28%	$	405,051	$	712		0.70	%	$	379,544	$	502		0.52	%
Time deposits		170,151		1,902		1.49%		163,746		1,591		1.30%		228,869		1,226		2.12	%		168,933		681		1.60	%
Total interest-bearing deposits		543,685		3,277		0.81%		484,923		2,276		0.63%		633,920		1,938		1.21	%		548,477		1,183		0.86	%
Borrowed funds, short-term		2,817		98		4.64%		5,237		100		2.55%		2,050		29		5.71	%		2,050		33		6.31	%
Borrowed funds, long-term		18,661		342		2.45%		37,011		854		3.09%		31,750		204		2.54	%		17,753		109		2.42	%
Total borrowed funds		21,478		440		2.74%		42,248		954		3.02%		33,800		233		2.74	%		19,803		142		2.84	%
Total interest-bearing liabilities		565,163		3,717		0.88%		527,171		3,230		0.82%		667,720		2,171		1.29	%		568,280		1,325		0.93	%
Noninterest-bearing demand deposits		128,590		-		-		127,331		-		-		154,837		—		—			134,183		—		—
Funding and cost of funds		693,753		3,717		0.72%		654,502		3,230		0.66%		822,557		2,171		1.05	%		702,463		1,325		0.75	%
Other noninterest-bearing liabilities		10,494						9,580						13,826							10,733
Total Liabilities		704,247						664,082						836,383							713,196
Stockholders' Equity		59,311						55,837						85,106							59,932
Total Liabilities and Stockholders' Equity	$	763,558					$	719,919					$	921,489						$	773,128
Net interest income			$	18,332					$	16,462					$	7,062						$	6,190

Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						3.25%						3.10%						2.99	%						3.19	%

Net interest margin (net interest income as a percentage of average interest-earning assets)						3.43%						3.28%						3.27	%						3.39	%

3730

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Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Corporation’s interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate), rate (change in rate multiplied by prior year volume) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on loans and securities reflect the changes in interest income on a fully tax equivalent basis.

(Dollar amounts in thousands)	Nine months ended September 30,						Three Months Ended September 30,
	2018 versus 2017						2019 versus 2018
	Increase (Decrease) due to						Increase (Decrease) due to
	Volume		Rate		Total		Volume		Rate			Total
Interest income:
Loans	$	1,466	$	745	$	2,211	$	1,181	$	307		$	1,488
Securities		(21)		48		27		27		25			52
Interest-earning deposits with banks		4		73		77		123		16			139
Federal bank stocks		(16)		58		42		22		17			39
Total interest-earning assets		1,433		924		2,357		1,353		365			1,718

Interest expense:
Interest-bearing deposits		299		702		1,001		205		550			755
Borrowed funds, short-term		(59)		57		(2)		—		(4	)		(4	)
Borrowed funds, long-term		(363)		(149)		(512)		90		5			95
Total interest-bearing liabilities		(123)		610		487		295		551			846
Net interest income	$	1,556	$	314	$	1,870	$	1,058	$	(186	)	$	872

Provision for loan losses. The Corporation records provisions for loan losses to maintain a level of total allowance for loan losses that management believes, to the best of its knowledge, covers all probable incurred losses estimable at each reporting date. Management considers historical loss experience, the present and prospective financial condition of borrowers, current conditions (particularly as they relate to markets where the Corporation originates loans), the status of nonperforming assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio.

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Information pertaining to the allowance for loan losses and nonperforming assets for the three months ended September 30, 2019 and 2018 is as follows:

(Dollar amounts in thousands)	As of or for the three months ended
	September 30,
	2019			2018
Balance at the beginning of the period	$	6,580		$	6,118
Provision for (recovery of) loan losses		(145	)		300
Charge-offs		(69	)		(76	)
Recoveries		143			18
Balance at the end of the period	$	6,509		$	6,360

Nonperforming loans	$	4,977		$	5,488
Nonperforming assets		5,458			6,088
Nonperforming loans to total loans		0.72	%		0.92	%
Nonperforming assets to total assets		0.58	%		0.79	%
Allowance for loan losses to total loans		0.94	%		1.06	%
Allowance for loan losses to nonperforming loans		130.78	%		115.89	%

Nonperforming loans decreased $1.0 million, or 17.0% to $5.0 million at September 30, 2019 from $6.0 million at June 30, 2019. This was primarily due to changes in the non-accrual status of five loans. Three loans totaling $525,000 were removed from non-accrual status after the application of payments to past due balances brought the loans current. Additionally, one $423,000 residential real estate loan previously on non-accrual was paid in full and one $91,000 non-accrual residential real estate loan was transferred to OREO.

As of September 30, 2019, the Corporation’s classified and criticized assets amounted to $20.8 million, or 2.2% of total assets, with $17.2 million classified as substandard and $3.6 million identified as special mention. This compares to classified and criticized assets of $25.5 million, or 2.8% of total assets, with $19.8 million classified as substandard and $5.7 million identified as special mention at June 30, 2019. This $4.7 million decrease was primarily related to a $2.5 million payoff of a commercial relationship previously identified as substandard and the upgrade of a $2.1 million commercial relationship from special mention to pass during the third quarter of 2019.

The provision for loan losses decreased $445,000 to a recovery of $145,000 for the three months ended September 30, 2019 from a provision of $300,000 for the same period in 2018. This recovery was primarily due to the aforementioned improvement in the criticized and classified loan balances during the three months ended September 30, 2019.

Noninterest income. Noninterest income increased $147,000, or 13.8%, to $1.2 million for the three months ended September 30, 2019, compared to $1.1 million for the same period in 2018 due to increases in gains of the sale of securities, gains on the sale of loans and other income of $44,000, $42,000 and $67,000 respectively. The increase in other income was primarily driven by increases in ATM fees.

Noninterest expense. Noninterest expense increased $203,000, or 3.4%, to $5.8 million for the three months ended September 30, 2019 from $5.6 million for the same period in 2018. The increase primarily related to increases in compensation and benefits expense and other noninterest expense of $668,000 and $229,000, respectively, partially offset by a reduction in acquistion costs and FDIC insurance expense of $677,000 and $103,000, respectively. The increases primarily related to costs associated with the new banking offices acquired in the Community First acquisition and normal salary and benefit and operating expense increases. The decrease in FDIC insurance expense was a result of utilizing Small Bank assessment credits of $112,000 during the period.

Provision for income taxes. The provision for income taxes increased $257,000 to $444,000 for the three months ended September 30, 2019 compared to $187,000 for the same period in the prior year as a result of the increase in net income before provision for income taxes.

Table of Contents

Comparison of Results for the Nine Months Ended September 30, 2019 and 2018

General. Net income available to common stockholders increased $2.4 million, or 60.1%, to $6.3 million for the nine months ended September 30, 2019 from $3.9 million for the same period in 2018. This increase was the result of increases in net interest income and noninterest income of $3.1 million and $388,000, respectively, and a decrease of $675,000 in the provision for loan losses, partially offset by increases in noninterest expense, provision for income taxes and preferred stock dividends of $1.1 million, $637,000 and $91,000, respectively.

Net interest income. Tax equivalent net interest income increased $3.1 million, or 17.1%, to $21.5 million for the nine months ended September 30, 2019 from $18.3 million for the nine months ended September 30, 2018. This increase was attributed to an increase in tax equivalent interest income of $5.2 million, partially offset by an increase in interest expense of $2.1 million.

Interest income. Tax equivalent interest income increased $5.2 million, or 23.7%, to $27.3 million for the nine months ended September 30, 2019 from $22.0 million for the same period in 2018. This increase was attributed to increases in interest earned on loans, interest on deposits with banks, and securities and dividends on federal bank stocks of $4.8 million, $169,000, $145,000 and $95,000, respectively.

Tax equivalent interest earned on loans receivable increased $4.8 million, or 24.4%, to $24.6 million for the nine months ended September 30, 2019 compared to $19.8 million for the same period in 2018. This increase resulted from a $111.6 million, or 18.9%, increase in average loans, accounting for an increase of $3.9 million in interest income. The increase in loans receivable was related to the acquisition of Community First Bancorp, Inc. in October 2018. Adding to this favorable volume variance, the average yield on loans increased 21 basis points to 4.69% for the nine months ended September 30, 2019, versus 4.48% for the same period in 2018. This favorable yield variance accounted for a $941,000 increase in interest income. Accretion of purchase accounting adjustments on acquired loans accounted for approximately 5 basis points of the yield increase.

Interest earned on deposits with banks increased $169,000, or 74.1%, to $397,000 for the nine months ended September 30, 2019 compared to $228,000 for the nine months ended September 30, 2018. This increase resulted from an $8.5 million increase in the average balance of interest-earning deposits accounting for an increase of $108,000 in interest income. Additionally, a 34 basis point increase in the average yield on these accounts to 1.81% for the nine months ended September 30, 2019, versus 1.47% for the same period in 2018, accounting for a $61,000 increase in interest income.

Tax equivalent interest earned on securities increased $145,000, or 8.0%, to $2.0 million for the nine months ended September 30, 2019 compared to $1.8 million for the nine months ended September 30, 2018. This increase resulted from a 18 basis point increase in the average yield on securities to 2.62% for the nine months ended September 30, 2019 versus 2.44% for the same period in 2018. This favorable yield variance accounted for a $129,000 increase in interest income. Additionally, the average balance of securities increased $841,000 accounting for a $16,000 increase in interest income.

Dividends on federal bank stocks increased $95,000, or 43.0%, to $316,000 for the nine months ended September 30, 2019 from $221,000 for the same period in 2018. This increase was primarily due to a $1.4 million, or 31.3%, increase in the average balance of federal bank stocks, accounting for a $74,000 increase in interest income. Furthermore, an increase of 56 basis points in the average yield on federal bank stocks to 7.20% for the nine months ended September 30, 2019, versus 6.64% for the same period in 2018, accounted for a $21,000 increase in interest income.

Interest expense. Interest expense increased $2.1 million, or 56.4%, to $5.8 million for the nine months ended September 30, 2019 from $3.7 million for the same period in 2018. This increase in interest expense can be attributed to a $1.8 million increase in interest incurred on deposits and an increase of $329,000 in interest incurred on borrowed funds.

Interest expense incurred on deposits increased $1.8 million, or 54.0%, to $5.0 million for the nine months ended September 30, 2019 compared to $3.3 million for the same period in 2018. The average cost of interest-bearing deposits increased 28 basis points to 1.09% for the nine months ended September 30, 2019, versus 0.81% for the same period in 2018, accounting for a $1.3 million increase in interest expense. Additionally, the average balance of interest-bearing deposits increased $75.1 million, or 13.8%, to $618.8 million for the nine months ended September 30, 2019, compared to $543.7 million for the same period in 2018 causing a $498,000 increase in interest expense. This increase was primarily due to the acquisition of Community First in October 2018.

Interest expense incurred on borrowed funds increased $329,000, or 74.8%, to $769,000 for the nine months ended September 30, 2019, compared to $440,000 for the same period in the prior year. The average balance of borrowed funds increased $16.1 million, or 74.8%, to $37.5 million for the nine months ended September 30, 2019, compared to $21.5 million for the same period in 2018 causing a $335,000 increase in interest expense. The increase in the outstanding balance of borrowed funds primarily resulted from three additional $5.0 million FHLB long-term notes taken in December 2018. Additionally, the average cost of long-term borrowed funds increased 11 basis points to 2.56% for the nine months ended September 30, 2019 compared to 2.45% for the same period in 2018 causing a $16,000 increase in interest expense. Partially offsetting these increases, the average cost of short-term borrowed funds decreased 86 basis points to 3.78% for the nine months ended September 30, 2019 compared to 4.64% for the same period in 2018 causing a $22,000 decrease in interest expense.

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(Dollar amounts in thousands)	Nine Months Ended September 30,
	2019							2018
	Average				Yield/			Average				Yield/
	Balance		Interest		Rate			Balance		Interest		Rate
Interest-earning assets:
Loans, taxable	$	681,235	$	24,002		4.71	%	$	569,745	$	19,223		4.51	%
Loans, tax exempt		20,770		609		3.92	%		20,661		568		3.68	%
Total loans receivable		702,005		24,611		4.69	%		590,406		19,791		4.48	%
Securities, taxable		82,335		1,606		2.61	%		73,705		1,312		2.38	%
Securities, tax exempt		17,450		348		2.67	%		25,239		497		2.63	%
Total securities		99,785		1,954		2.62	%		98,944		1,809		2.44	%
Interest-earning deposits with banks		29,294		397		1.81	%		20,763		228		1.47	%
Federal bank stocks		5,860		316		7.20	%		4,461		221		6.64	%
Total interest-earning cash equivalents		35,154		713		2.71	%		25,224		449		2.38	%
Total interest-earning assets		836,944		27,278		4.36	%		714,574		22,049		4.13	%
Cash and due from banks		3,336							2,812
Other noninterest-earning assets		62,702							46,172
Total Assets	$	902,982						$	763,558
Interest-bearing liabilities:
Interest-bearing demand deposits	$	395,464	$	1,827		0.62	%	$	373,534	$	1,375		0.49	%
Time deposits		223,349		3,218		1.93	%		170,151		1,902		1.49	%
Total interest-bearing deposits		618,813		5,045		1.09	%		543,685		3,277		0.81	%
Borrowed funds, short-term		5,536		156		3.78	%		2,817		98		4.64	%
Borrowed funds, long-term		31,998		613		2.56	%		18,661		342		2.45	%
Total borrowed funds		37,534		769		2.74	%		21,478		440		2.74	%
Total interest-bearing liabilities		656,347		5,814		1.18	%		565,163		3,717		0.88	%
Noninterest-bearing demand deposits		150,096		—		—			128,590		—		—
Funding and cost of funds		806,443		5,814		0.96	%		693,753		3,717		0.72	%
Other noninterest-bearing liabilities		13,667							10,494
Total Liabilities		820,110							704,247
Stockholders' Equity		82,872							59,311
Total Liabilities and Stockholders' Equity	$	902,982						$	763,558
Net interest income			$	21,464						$	18,332

Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						3.17	%						3.25	%

Net interest margin (net interest income as a percentage of average interest-earning assets)						3.43	%						3.43	%

Table of Contents

(Dollar amounts in thousands)	Nine Months Ended September 30,
	2019 versus 2018
	Increase (Decrease) due to
	Volume		Rate			Total
Interest income:
Loans	$	3,879	$	941		$	4,820
Securities		16		129			145
Interest-earning deposits with banks		108		61			169
Federal bank stocks		74		21			95
Total interest-earning assets		4,077		1,152			5,229

Interest expense:
Interest-bearing deposits		498		1,270			1,768
Borrowed funds, short-term		80		(22	)		58
Borrowed funds, long-term		255		16			271
Total interest-bearing liabilities		833		1,264			2,097
Net interest income	$	3,244	$	(112	)	$	3,132

Table of Contents

Information pertaining to the allowance for loan losses and nonperforming assets for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 is as follows:

(Dollar amounts in thousands)	As of or for the nine months				As of or for the nine months ended
	September 30,				September 30,
	2018		2017		2019			2018
Balance at the beginning of the period	$	6,127	$	5,545	$	6,508		$	6,127
Provision for loan losses		980		633		305			980
Charge-offs		(807)		(275)		(544	)		(807	)
Recoveries		60		37		240			60
Balance at the end of the period	$	6,360	$	5,940	$	6,509		$	6,360

Non-performing loans	$	5,488	$	3,731
Non-performing assets		6,088		4,160
Non-performing loans to total loans		0.92%		0.64%
Non-performing assets to total assets		0.79%		0.54%
Nonperforming loans					$	4,977		$	5,488
Nonperforming assets						5,458			6,088
Nonperforming loans to total loans						0.72	%		0.92	%
Nonperforming assets to total assets						0.58	%		0.79	%
Allowance for loan losses to total loans		1.06%		1.02%		0.94	%		1.06	%
Allowance for loan losses to non-performing loans		115.89%		159.21%
Allowance for loan losses to nonperforming loans						130.78	%		115.89	%

Nonperforming loans increased ~~$1.8~~$1.9 million, or ~~48.6%~~98.1%, to ~~$5.5~~$5.0 million at September 30, ~~2018~~2019 from ~~$3.7~~$3.0 million at December 31, ~~2017.~~2018. This ~~increase~~ was primarily due to ~~a $2.5~~one commercial relationships totaling $2.4 million ~~commercial mortgage loan~~ being ~~place~~placed on ~~nonaccrual~~non-accrual status ~~based on~~partially offset by the ~~deteriorating financial condition~~payoff of ~~the borrower. Given the estimated value of the borrower's significant~~one residential real estate ~~holdings, most of which are pledged as collateral for the~~ loan the Corporation does not currently expect to incur any loss on this loan and the loan continues to pay per its contractual terms. Partially offsetting this increase, a $559,000 commercial mortgage was transferred to OREO and a $789,000 commercial relationship was repaid in fulltotaling $423,000 during the nine months ended September 30, ~~2018. Of the $5.5 million in nonperforming loans, $3.1 million were not 30 days or more past due at September 30, 2018.~~2019.

As of September 30, ~~2018,~~2019, the Corporation’s classified and criticized assets amounted to ~~$14.5~~$20.8 million, or ~~1.9%~~2.2% of total assets, with ~~$10.6~~$17.2 million classified as substandard and ~~$3.9~~$3.6 million identified as special mention. This compares to classified and criticized assets of ~~$14.8~~$22.9 million, or ~~2.0%~~2.5% of total assets, with ~~$11.6~~$16.4 million classified as substandard and ~~$3.2~~$6.5 million identified as special mention at December 31, ~~2017.~~2018. This decrease was primarily related to the ~~risk~~ rating ~~upgrade of one $1.9 million commercial loan relationship, the payoff~~upgrades of two commercial ~~loan~~ relationships totaling ~~$1.1~~$2.4 million, the payoffs of five commercial relationships totaling $1.9 million, the $423,000 payoff of a residential real estate loan and the ~~aforementioned $559,000 loan transferred~~transfer to ~~OREO. These favorable changes to the Corporation's classified and criticized assets were~~OREO of one commercial relationship totaling $232,000, partially offset by the ~~risk~~ rating downgrades of ~~three~~five commercial ~~loan~~ relationships ~~to special mention and substandard.~~totaling $3.4 million.

The provision for loan losses ~~increased $347,000,~~decreased $675,000, or ~~54.8%~~68.9%, to ~~$980,000~~$305,000 for the nine months ended September 30, ~~2018~~2019 from ~~$633,000~~$980,000 for the same period in ~~2017 due primarily~~2018 as criticized and classified loans improved by $2.1 million and portfolio net charge-offs were lower compared to ~~general growth~~the same period in ~~the loan portfolio and certain charge-offs experienced during the first nine months of~~ 2018.

Noninterest income. Noninterest income ~~decreased $987,000,~~increased $388,000, or ~~24.7%~~12.9%, to ~~$3.0~~$3.4 million for the nine months ended September 30, ~~2018 from $4.0~~2019, compared to $3.0 million for the same period in ~~2017. During~~2018. Fees and service charges increased $194,000, primarily associated with the operation of the three new full-service banking offices which were acquired from Community First and general increases in overdraft fee income. Additionally, net gains on the sale of loans and net gains on the sale of securities increased $69,000 and $52,000, respectively.

Noninterest expense. Noninterest expense increased $1.1 million, or 7.2%, to $16.6 million for the nine months ended September 30, ~~2017,~~2019 from $15.5 million for the ~~Corporation recorded a $1.3 million bargain purchase gain~~same period in 2018. The increase primarily related to increases in compensation and benefits expense, other noninterest expense and occupancy and equipment expense of $1.4 million, $718,000 and $272,000, respectively. The increases primarily related to costs associated with the aforementioned new banking offices and normal salary and benefit and operating expense increases. These increases in noninterest expense were partially offset by a decreases of $1.0 million in acquisition costs and $124,000 in FDIC insurance expense. The decrease in FDIC insurance expense was a result of ~~NHBT. Also~~utilizing Small Bank assessment credits of $112,000 during the period.

Provision for income taxes. The provision for income taxes increased $637,000, or 86.7%, to $1.4 million for the nine months ended September 30, 2017, the Corporation recorded a $508,000 other-than-temporary impairment charge on a subordinated debt investment issued by First NBC Bank Holding Company. Partially offsetting the impairment charge, the Corporation realized security gains of $350,000 during the nine months ended September 30, 2017. During the nine months ended September 30, 2018, the Corporation realized security losses of $34,000. Additionally, fees and service charges increased $138,000 as overdraft charges2019 compared to $735,000 for ~~the nine months ended September 30, 2018 outpaced~~ the same period in the prior year and other income increased $168,000 due to increased interchange fee income and fair value adjustments related to the Corporation's equity securities. Partially offsetting these favorable items, gains on the sales of loans totaled $60,000 for the nine months ended September 30, 2018, compared to $176,000 for the same period in 2017.

~~Noninterest expense.~~ Noninterest expense increased $796,000, or 5.4%, to $15.5 million for the nine months ended September 30, 2018 compared to $14.7 million for the same period in 2017. This increase in noninterest expense can be attributed to increases in compensation and benefits and professional fees of $536,000 and $137,000, respectively.

~~Table of Contents~~

Compensation and employee benefits increased $536,000, or 7.7%, to $7.5 million for the nine months ended September 30, 2018 compared to $7.0 million for the same period in 2017. This increase was primarily theas a result of ~~increases in salaries, insurance benefits and stock compensation expense of $341,000, $91,000 and $22,000, respectively. These increases are primarily related to costs associated with~~ the ~~operation of the new full-service banking office in Chester, West Virginia which was acquired from Northern Hancock, increased health insurance costs and normal salary and benefit increases.~~

Professional fees costs increased $137,000, or 23.8%, to $712,000 for the nine months ended September 30, 2018 compared to $575,000 for the same period in 2017. The increase was primarily the result of additional consulting agreements added during 2018.

~~Provision for income taxes~~. The provision for income taxes decreased $243,000, or 24.9%, to $735,000 for the nine months ended September 30, 2018 compared to $978,000 for the same period in the prior year. This related to an decrease in the Corporation’s effective tax rate to 15.7% for the nine months ended September 30, 2018 compared to 20.9% for the same period in 2017, partially offset by an increase in net income before provision for income taxes. The decrease in the Corporation's effective tax rate was due to the enactment of the Tax Cuts and Job Act in December 2017 and the reduction of the corporate income tax rate from a maximum of 35% to a flat 21%.

LIQUIDITY

The Corporation’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, Federal Reserve and other correspondent banks, and amortization and prepayments of outstanding loans and maturing securities. During the nine months ended September 30, ~~2018,~~2019, the Corporation used its sources of funds primarily to ~~fund loan advances~~reduce short-term borrowed funds and ~~repay long-term borrowed funds.~~increase interest earning time deposits and investment balances. As of September 30, ~~2018,~~2019, the Corporation had outstanding loan commitments, including undisbursed loans and amounts available under credit lines, totaling ~~$99.9~~$107.4 million, and standby letters of credit totaling ~~$96,000,~~$979,000, net of collateral maintained by the Bank.

At September 30, ~~2018,~~2019, time deposits amounted to ~~$169.4~~$227.2 million, or ~~24.9%~~28.1% of the Corporation’s total consolidated deposits, including approximately ~~$44.0~~$64.2 million of which are scheduled to mature within the next year. Management of the Corporation believes (i) it has adequate resources to fund all of its commitments, (ii) all of its commitments will be funded as required by related maturity dates and (iii) based upon past experience and current pricing policies, it can adjust the rates of time deposits to retain a substantial portion of maturing liabilities if necessary.

Aside from liquidity available from customer deposits or through sales and maturities of securities, the Corporation and the Bank have alternative sources of funds. These sources include a line of credit for the Corporation with a correspondent bank, the Bank's line of credit and term borrowing capacity from the FHLB and the Federal Reserve’s discount window and, to a more limited extent, through the sale of loans. At September 30, ~~2018,~~2019, the Corporation had borrowed funds of ~~$19.8~~$33.8 million consisting of ~~$15.0~~$30.0 million of long-term FHLB advances, a ~~$2.8~~$1.7 million long-term advance with a correspondent bank and $2.1 million outstanding on a line of credit with a correspondent bank. At September 30, ~~2018,~~2019, the Corporation’s borrowing capacity with the FHLB, net of funds borrowed and irrevocable standby letters of credit issue to secure certain deposit accounts, was ~~$191.6~~$250.1 million.

Management is not aware of any conditions, including any regulatory recommendations or requirements, which would adversely impact its liquidity or its ability to meet funding needs in the ordinary course of business.

RECENT REGULATORY DEVELOPMENTS

The final rules implementing the Basel Committee on Banking Supervision’s (BCBS) capital guidelines for U.S. banks were approved by the FRB and FDIC. Under the final rules, minimum requirements increased for both the quantity and quality of capital. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0% and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer comprised of common equity Tier 1 capital was also established above the regulatory minimum capital requirements. This capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and ~~will increase~~has increased each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revised the definition and calculation of Tier 1 capital, Total Capital and risk-weighted assets. The phase-in period for the final rules became effective on January 1, 2015 with full compliance with all of the final rules’ requirements phased in over a multi-year schedule ~~to be~~which was fully phased-in byon January 1, 2019.

At September 30, ~~2018,~~2019, the Bank exceeded all minimum capital requirements under these capital guidelines.

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CRITICAL ACCOUNTING POLICIES

The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily though the use of internal cash flow modeling techniques.

The most significant accounting policies followed by the Corporation are presented in Note 1 to the consolidated financial statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. These policies, along with the disclosures presented in the other financial statement notes provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management has identified the following as critical accounting policies.

Allowance for loan losses. The Corporation considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses. All of these factors may be susceptible to significant change. Among the many factors affecting the allowance for loan losses, some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management’s estimates, additional provisions for loan losses may be required that would adversely impact the Corporation’s financial condition or earnings in future periods.

Other-than-temporary impairment. Management evaluates debt securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic, market or other concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Corporation has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.

Goodwill and intangible assets. Goodwill represents the excess cost over fair value of assets acquired in a business combination. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. The impairment test is a two-step process that begins with an initial impairment evaluation. If the initial evaluation suggests that an impairment of the asset value exists, the second step is to determine the amount of the impairment. If the tests conclude that goodwill is impaired, the carrying value is adjusted and an impairment charge is recorded. As of November 30, 2017, the required annual impairment test of goodwill was performed and management concluded that no impairment existed as of that date. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values. Goodwill is subject to ongoing periodic impairment tests based on the fair value of the reporting unit compared to its carrying amount, including goodwill. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. At November 30, 2018, the required annual impairment test of goodwill was performed and no impairment existed as of the valuation date. If for any future period it is determined that there has been impairment in the carrying value of our goodwill balances, the Corporation will record a charge to earnings, which could have a material adverse effect on net income, but not risk based capital ratios.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk for the Corporation consists primarily of interest rate risk exposure and liquidity risk. Since virtually all of the interest-earning assets and interest-bearing liabilities are at the Bank, virtually all of the interest rate risk and liquidity risk lies at the Bank level. The Bank is not subject to currency exchange risk or commodity price risk, and has no trading portfolio, and therefore, is not subject to any trading risk. In addition, the Bank does not participate in hedging transactions such as interest rate swaps and caps. Changes in interest rates will impact both income and expense recorded and also the market value of long-term interest-earning assets and interest-bearing liabilities. Interest rate risk and liquidity risk management is performed at the Bank level. Although the Bank has a diversified loan portfolio, loans outstanding to individuals and businesses depend upon the local economic conditions in the immediate trade area.

One of the primary functions of the Corporation’s asset/liability management committee is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of the asset/liability committee is to manage the relationship between interest rate sensitive assets and liabilities, thereby minimizing the fluctuations in the net interest margin, which achieves consistent growth of net interest income during periods of changing interest rates.

Interest rate sensitivity is the result of differences in the amounts and repricing dates of the Bank’s rate sensitive assets and rate sensitive liabilities. These differences, or interest rate repricing “gap”, provide an indication of the extent that the Corporation’s net interest income is affected by future changes in interest rates. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities and is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income and a positive gap would adversely affect net interest income. The closer to zero that gap is maintained, generally, the lesser the impact of market interest rate changes on net interest income.

Assumptions about the timing and variability of cash flows are critical in gap analysis. Particularly important are the assumptions driving mortgage prepayments and the expected attrition of the core deposits portfolios. These assumptions are based on the Corporation’s historical experience, industry standards and assumptions provided by a federal regulatory agency, which management believes most accurately represents the sensitivity of the Corporation’s assets and liabilities to interest rate changes. As of September 30, ~~2018,~~2019, the Corporation’s interest-earning assets maturing or repricing within one year totaled ~~$177.0~~$270.6 million while the Corporation’s interest-bearing liabilities maturing or repricing within one-year totaled ~~$155.5~~$196.0 million, providing an excess of interest-earning assets over interest-bearing liabilities of ~~$21.5million.~~$74.6 million. At September 30, ~~2018,~~2019, the percentage of the Corporation’s assets to liabilities maturing or repricing within one year was ~~113.8%~~138.1%.

For more information, see “Market Risk Management” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Item 4. Controls and Procedures

The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e).

As of September 30, ~~2018,~~2019, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s CEO and CFO, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Corporation’s CEO and CFO concluded that the Corporation’s disclosure controls and procedures were effective. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Corporation completed its evaluation.

There has been no change made in the Corporation’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Corporation is involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of management, after consultation with legal counsel, that these matters will not materially affect the Corporation’s consolidated financial position or results of operations.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a)	Not applicable.

(b)	Not applicable.

Item 6. Exhibits

Exhibit 31.1	Rule 13a-14(a) Certification of Principal Executive Officer
Exhibit 31.2	Rule 13a-14(a) Certification of Principal Financial Officer
Exhibit 32.1	CEO Certification Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2	CFO Certification Pursuant to 18 U.S.C. Section 1350
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	EMCLAIRE FINANCIAL CORP

Date: November ~~9, 2018~~8, 2019	By:	/s/ William C. Marsh
	William C. Marsh
	Chairman of the Board,
	President and Chief Executive Officer

Date: November ~~9, 2018~~8, 2019	By:	/s/ Amanda L. Engles
	Amanda L. Engles
	Chief Financial Officer
	Treasurer

4441

(Dollar amounts in thousands)	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Balance at the beginning of the period	$	3,500	$	135	$	8,132	$	136
Total gains or losses (realized/unrealized):		-		-		-		-
Included in earnings		-		-		1		-
Included in other comprehensive income		-		(1)		-		(2)
Acquired		-		-		-		-
Sold out of Level 3		-		-		(25)		-
Transfers in and/or out of Level 3		-		-		(4,608)		-
Balance at the end of the period	$	3,500	$	134	$	3,500	$	134

(Dollar amounts in thousands)	Amount Reclassified
	from Accumulated
	Other Comprehensive
	Income		Affected Line Item in the
Details about Accumulated Other	For the nine months		Statement Where Net
Comprehensive Income Components	ended September 30, 2017		Income is Presented
Unrealized gains and losses on available-for-sale securities	$	350	Net gain on sale of available-for-sale securities
Unrealized gains and losses on available-for-sale securities		(508)	Other than temporary impairment losses
		54	Provision for income taxes
Total reclassifications for the period	$	(104)	Net of tax

(Dollar amounts in thousands)	Three months ended September 30,
	2018						2017
	Average				Yield /		Average				Yield /
	Balance		Interest		Rate		Balance		Interest		Rate
Interest-earning assets:
Loans, taxable	$	574,904	$	6,536		4.51%	$	532,225	$	5,763		4.30%
Loans, tax exempt		19,294		180		3.70%		24,495		289		4.69%
Total loans receivable		594,198		6,716		4.48%		556,720		6,052		4.31%
Securities, taxable		75,759		464		2.43%		75,367		421		2.22%
Securities, tax exempt		23,733		158		2.65%		26,100		183		2.78%
Total securities		99,492		622		2.48%		101,467		604		2.36%
Interest-earning deposits with banks		25,670		112		1.73%		33,512		98		1.16%
Federal bank stocks		4,453		65		5.79%		4,882		64		5.20%
Total interest-earning cash equivalents		30,123		177		2.33%		38,394		162		1.67%
Total interest-earning assets		723,813		7,515		4.12%		696,581		6,818		3.88%
Cash and due from banks		2,940						2,720
Other noninterest-earning assets		46,375						45,308
Total Assets	$	773,128					$	744,609
Interest-bearing liabilities:
Interest-bearing demand deposits	$	379,544	$	502		0.52%	$	340,771	$	314		0.37%
Time deposits		168,933		681		1.60%		166,872		510		1.21%
Total interest-bearing deposits		548,477		1,183		0.86%		507,643		824		0.64%
Borrowed funds, short-term		2,050		33		6.31%		2,500		28		4.50%
Borrowed funds, long-term		17,753		109		2.42%		38,766		294		3.01%
Total borrowed funds		19,803		142		2.84%		41,266		322		3.10%
Total interest-bearing liabilities		568,280		1,325		0.93%		548,909		1,146		0.83%
Noninterest-bearing demand deposits		134,183		-		-		128,254		-		-
Funding and cost of funds		702,463		1,325		0.75%		677,163		1,146		0.67%
Other noninterest-bearing liabilities		10,733						10,061
Total Liabilities		713,196						687,224
Stockholders' Equity		59,932						57,385
Total Liabilities and Stockholders' Equity	$	773,128					$	744,609
Net interest income			$	6,190					$	5,672

Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						3.19%						3.05%

Net interest margin (net interest income as a percentage of average interest-earning assets)						3.39%						3.23%

(Dollar amounts in thousands)	As of or for the three months ended
	September 30,
	2018		2017
Balance at the beginning of the period	$	6,118	$	5,767
Provision for loan losses		300		270
Charge-offs		(76)		(101)
Recoveries		18		4
Balance at the end of the period	$	6,360	$	5,940

Nonperforming loans	$	5,488	$	3,731
Nonperforming assets		6,088		4,160
Nonperforming loans to total loans		0.92%		0.64%
Nonperforming assets to total assets		0.79%		0.54%
Allowance for loan losses to total loans		1.06%		1.02%
Allowance for loan losses to non-performing loans		115.89%		159.21%